Monday, July 31, 2006

Dean Baker on Bubbles and Recessions

This piece, by Dean Baker of the Center for Economic and Policy Research, comes to us via TomPaine.com:

The Coming Housing Crash

All the economists who missed the stock bubble—this is almost all economists—are just about to be embarrassed again. Several reports released this week provide the strongest evidence yet that the housing bubble may finally be deflating.

Sales of new and existing homes are both down more than 10 percent from their peaks last year. Mortgage applications are down 20 percent. Sale prices have barely risen from the level of last year, and are actually down after adjusting for inflation. Inventories of new and existing homes both stand at record levels, and the vacancy rate for ownership units has also hit a new high.

This is a very different picture from a year ago, when housing was considered the best investment around. At that time, homes in the hottest markets would routinely sell the day they came on the market for more than the asking price. The result of this frenzy was an unprecedented run-up in house prices.
...
But, it was inevitable that the bubble would eventually collapse. The record run-up in housing prices led to record rates of housing construction. With population growth slowing, the country was building homes far more rapidly than the market could absorb them. At some point, excess supply will put downward pressure on prices.
...
The decline in housing prices will sharply limit the extent to which people can borrow against their home to support their consumption. This will cause savings to rebound from their current negative rates to more normal levels—at 6 to 8 percent of disposable income—but will be associated with a sharp falloff in consumption.

Together these effects virtually guarantee a recession, and probably a rather severe recession. Even worse, there is no easy route to recovery from a recession that results from a collapse of a housing bubble, just as there was no easy route to recover from the stock crash induced recession of 2001. Greenspan used the housing bubble to recover from that crash, because he saw no other mechanism. Unless Bernanke can find some other bubble to inflate, the recovery may be a long slow process. It took Japan almost 15 years to recover from the crash of its stock and housing bubbles.

The crash and post-crash world will not be pretty. Millions of people will lose their jobs and their homes. Unfortunately, the economists who led us down this path are not likely to be among the ones who suffer severe consequences.

31 Comments:

Anonymous Anonymous said...

I don't know . . .

With all the mainstream media stories recently about rising inventories, buyers on the sidelines, seller denial, and ultimately declining prices, my guess is we're in the middle of another housing boom.

7/31/2006 12:00:00 PM  
Anonymous Jay said...

That is a strange contrarian take on the housing market.

I'm not sure I understand your logic. Can you explain?

JAY

7/31/2006 12:27:00 PM  
Anonymous Anonymous said...

Jay,

No logic, I was just joking because the media has missed this for so long, that probably now something else is really happening.

Sorry!

7/31/2006 12:48:00 PM  
Anonymous Anonymous said...

Record levels of existing and new home builds last several years puts in place a huge inventory glut of homes in the next several years.
As psychology is shifting (negatively) house prices are heading lower. The marginal seller will set the new prices. while buyers wait for the panicking sellers to set the new comps.

Just look at any major tech stock chart in 1998-1999 period and see how the stock went decisively lower for 2-3 years. Lucent from Low $80's to $2 bucks. And the bottom feeders were calling a bottom all the way down at $30 then $18 then $10 then they gave up.

BAAAAAAAAWAAAAHAHAHAHA

Bob

7/31/2006 12:48:00 PM  
Anonymous Anonymous said...

These may be reasons for the current market anomalies:
Schultz suspects market manipulation

Schultz's latest letter arrived Sunday night. He offers this acid assessment of the recent rally: "There is a paradox in market prices as I write. We have gold, U.S. dollar, oil and most stock market indexes all showing a readiness to move up. It is an illogical combo. It may be a temporary fluke or it may be there's manipulation of the indexes going on."

Schultz, never afraid of a radical idea, takes manipulation seriously. He says: "It is fairly easy to manipulate stock indexes via just three or four blue chips, and the multinationals appear in several indexes. We've seen it before. Most stock markets were in virtual free fall and suddenly reversed into reverse head-and-shoulders buy patterns. This is a rarity. The U.S. dollar index may also be subject to manipulation."

http://www.marketwatch.com/news/story/Story.aspx?guid=%7B88

After the market crashes, it'll be the poor slobs who played this game who will be held accountable, not the policy wonks who perpetrated it.

7/31/2006 12:56:00 PM  
Anonymous Anonymous said...

only morons think that housing is
ok. ive never seen so many
for sale signs , fsbo,

7/31/2006 01:23:00 PM  
Blogger skep-tic said...

Here's some info for that guy who was asking if any "credible" sources were predicting a decline:

*************

HOUSE prices are set to drop in the US for the first time on record, US investment bank Goldman Sachs warned this weekend.

Prices in several segments of the market have already started to fall, and the overall market will move into the red even in nominal terms next year, fuelling fears that this will trigger a downturn in consumer spending and hit an already slowing US economy.

Jan Hatzius, economist at Goldman Sachs, said: “The risk is rising that nominal US home prices may be headed for an outright decline in 2007. It would be the first decline in national home prices ever recorded, at least in nominal terms.”

In real terms, prices have declined during several periods, including a 9% drop from 1979 to 1984.
**********************

7/31/2006 01:27:00 PM  
Blogger grim said...

The full text of Yellen's speech is available online, it's worth your time. She devotes a surprisingly large portion of her speech to housing.

Prospects for the U.S. Economy

Indeed, we have already seen some cooling in the housing sector, and this brings me to another factor that is likely to restrain growth—that is, the significant moderation in the rate of house-price appreciation. Slower increases in house prices could put a crimp in consumer spending in a couple of ways. First, some observers believe that consumers have been keeping their spending up by withdrawing equity from the increased value of their homes; of course, this source of funds starts to shrink as the pace of appreciation slows. Furthermore, there may be some pullback by consumers due what is called the wealth effect—that is, slower house-price appreciation reduces growth in their wealth and therefore their tendency to increase their spending.

While I expect the housing situation to have only moderating effects on economic activity going forward, I should note that we can't ignore the risks of more unpleasant scenarios developing. One scenario that we have heard a lot about in recent years is the possibility that there is a house-price "bubble," implying that prices got out of line with the fundamental value of houses and that the current softening could be just the beginning of a more precipitous fall. While I seriously doubt that we'll see anything like a "popping of the bubble"—in part because I'm not convinced there is a bubble, at least on a national level—I certainly do acknowledge that there is more reason to worry that house prices would fall sharply than that they would rise sharply.

7/31/2006 01:45:00 PM  
Anonymous Anonymous said...

Now the question is, when is it safe to buy a house?


jj

7/31/2006 01:55:00 PM  
Anonymous Anonymous said...

FYI

"My own experience in living through a housing bust here in central Connecticut from 1989-1997 7 years, horrendous years I may add. Housing fell 7% from 1989-1993, then 4% a year 1994-1996.

Nearly 40% over all. A new townhouse I bought in 1989 for 107K fell to 65K by late 1996. Another townhouse I bought new in 1992 for 90K dropped to 66K by 1997."

7/31/2006 01:57:00 PM  
Anonymous Theo said...

One thing I've not heard addressed. When discussing the bubble markest vs. the rest of the US, it is generally presented in some manner that those other parts of the country somehow have more common sense than to get into a bubble environment. However, is it possible that the historically low interest rates and lax lending practices that led to a RE bubble in the northeast, west coast and a few other markets were not also propping up housing values in the rest of the country? In other words would housing prices in the midwest have fallen in the last 5 years without the lower interest rates and lower lending standards and are those non-bubble markets going to suffer from the impending pop just like everyone else?

7/31/2006 02:06:00 PM  
Anonymous Anonymous said...

$3000 - URL JerseyShoreRealty.com is for sale.

http://newjersey.craigslist.org/rfs/188400350.html

7/31/2006 02:10:00 PM  
Anonymous Anonymous said...

Is there any area of residential real estate that will be immune from this (or at least relatively so)?

I'm thinking high-end waterfront property, Beverly Hills mansions, Park Avenue duplexes, etc...is there any place, or any type of residential property, that will be unaffected?

As you can see by my examples, I am wondering if there will be a "flight to quality," similar to what happens in the fixed income and stock markets, when things get bad.

NYC-metro area waterfront in the Hamptons at 40% off? Really????

7/31/2006 02:32:00 PM  
Anonymous Anonymous said...

anon 2:57

What is the reason for buying at 1989 and the again at 1992?

For rent? If so, did the rent increase over those years?

7/31/2006 03:05:00 PM  
Blogger rymingrealtor said...

Unfortunately, the economists who led us down this path are not likely to be among the ones who suffer severe consequences
What a telling quote !

Dean Baker has called this thing a bubble since 2003. But I guess now he's not alone.
KL

7/31/2006 03:07:00 PM  
Blogger BergenBuyer said...

It seems like everyone who speaks about a cooling market and that they don't think there is a bubble always throws in the disclaimer "at least on a national level"
For Example:
"While I seriously doubt that we'll see anything like a "popping of the bubble"—in part because I'm not convinced there is a bubble, at least on a national level..."

Although this may turn out to be true, I really don't have an opinion(I'm not paying as much attention to Nebraska's RE market as I am NJ's), it's interesting most are providing themselves a get out of jail free card in case there is a bigger bubble in certain areas.

I hope everyone that is trying to make a decision about buying is paying attention to the details of speeches, articles, etc. Don't think that because the Prez of the Fed Bank of SF doesn't think there is a housing bubble- nationally- that there isn't one in your backyard.

7/31/2006 03:07:00 PM  
Blogger skep-tic said...

who cares if there's a nat'l bubble? the majority of the nation's wealth is on the coasts. plus, the midwest is looking economic doomsday square in the face--- there hardly needs to be a bubble for prices to go down there

7/31/2006 03:27:00 PM  
Anonymous Huhu said...

Here is an idea to help the homebuilders move inventories:

0% 3/1, 4/1 or 5/1 ARM.

Marketing slogan:
'For a limited time only, get 0% financing for the next 5 (or 3,4) years when you buy ******* homes!'

Now that will get people excited and get properties sold without resorting to price cuts that would upset the previous buyers and cause writeoffs.

All rights reserved.

7/31/2006 03:34:00 PM  
Anonymous Anonymous said...

"Homeownership has become a vehicle for borrowing and leveraging as much as a source of financial security."
Former Fed Chairman Paul Volcker, Feb 11, 2005

7/31/2006 04:39:00 PM  
Anonymous jay said...

Is there any area of residential real estate that will be immune from this (or at least relatively so)?

A rental. Although not immune from rent hikes...

JAY

7/31/2006 04:54:00 PM  
Blogger chicagofinance said...

Ahhh....but what if can stick it to the Toll Brothers with rent control........... :-) ?

http://tinyurl.com/s69r7

7/31/2006 05:01:00 PM  
Anonymous Anonymous said...

Hi, Fellow Bloggers:

Could anyone with access to MLS please let me know the address of this house?

2303165

any comments, such as last sales price would also be highly appreciated.

It seems the seller is kinda motivated, lowered price by 60K.

7/31/2006 08:40:00 PM  
Anonymous Anonymous said...

Just a bit info:

Friends complained that her house listed at 630K got 1 offer of 560K,

another friend is looking to buy, saw around 10 houses in Morris, 2 she liked, both lowered twice from mid 700K to mid 600K. and the buyer agent suggested them offer 10-15% below asking price.

So maybe it won't be long that we can all start acting if we wanted to buy sth.. Maybe winter ttime?

7/31/2006 08:52:00 PM  
Blogger grim said...

It is more likely that the scenario will take years to play out, not months.

grim

7/31/2006 09:04:00 PM  
Blogger grim said...

MLS# 2303165

That MLS is one day on market, was this relisted?

I believe it's located on Stratford..

grim

7/31/2006 09:06:00 PM  
Anonymous Anonymous said...

he he...ok who wants to curse me first?

Wife and daughter got me a $300 pair of jeans and a $250 pair of sunglasses today.

I guess I am a hypocrite....he he...so I am confessing my sins to you all.

I really hate it when those two go shopping together.

But in my defense, I had nothing to do with it.

SAS

7/31/2006 09:09:00 PM  
Anonymous Anonymous said...

Thanks, Grim..

It was relisted. Originally listed at 869K for a long time..

I am more interested in this one: 2267697

Could you tell me the address? If it is still available, I might go to have a look..

Thanks a lot!

7/31/2006 09:20:00 PM  
Anonymous Anonymous said...

Grim with the recession and the hurricanes...SAS with the $550 jeans and sunglasses. Sad. Very sad state of affairs.

Where IS that Queens guy when we need impartial commentary?

Pat

7/31/2006 10:11:00 PM  
Blogger RentinginNJ said...

I hope everyone that is trying to make a decision about buying is paying attention to the details of speeches, articles, etc. Don't think that because the Prez of the Fed Bank of SF doesn't think there is a housing bubble- nationally- that there isn't one in your backyard.

It's important to take whatever you hear from a central banker with a grain of salt. Remember, these individuals are shepherds, not prophets. Their job isn’t to tell you what they believe will happen, but rather to steer the economy in a certain direction. They realize the risk posed by a housing bubble and want to remove some air without causing a crash. They hope that by “predicting” a soft landing, they can make it come true.

7/31/2006 10:13:00 PM  
Anonymous Anonymous said...

Housing is still completely unaffordable in this area unless you are making in the six figures as a single person. I don't know how people with kids do it. Must be all making $500,000 + if they live in North or Central Jersey or anywhere in the 5 boros.

Housing prices may (and only a "May") have leveled off, but rents are soaring especially in the 'other 4 boros' outside Manhattan and in the suburbs.

I see apartments in the worst parts of Jersey City (south of Communipaw Ave) for close to $2,000 + Heat, Hot Water. Same in Nassau county on Long Island (many apartments are illegal anyway) and in Queens.

But then again, you can either pay $3,500 - $4,000 in PITI on a one bedroom condo in Bergen or Hudson county or $2,000 - $2,500 a month rent for this one bedroom.

7/31/2006 11:26:00 PM  
Anonymous Anonymous said...

Anonymous said...
Is there any area of residential real estate that will be immune from this (or at least relatively so)?

I'm thinking high-end waterfront property, Beverly Hills mansions, Park Avenue duplexes, etc...is there any place, or any type of residential property, that will be unaffected?


The funny money 01-05 period will assure, these areas get clobbered. The seeds of destruction have been planted.

7/31/2006 11:49:00 PM  

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