"Our economy and our markets will not recover until the bulk of this housing correction is behind us."
Treasury Secretary Hank Paulson, Sept 7, 2008
Calculated Risk then proceeds to list reasons why the economy won't recover any time soon: housing prices are still well above historical trendline, the housing price-to-rent ratio is similarly well above historical trendline, the housing price-to-income ratio is also above historical its historical ratio, and the supply of unsold housing is high. Federal Reserve and Treasury Department money shoved into financial institutions can not push up housing prices hard enough to prevent the price correction. So more mortgage holders will abandon their mortgages and more home sales will be for less than what is owed.
Mish Shedlock does not expect the Fannie Mae and Freddie Mac bail-outs to cause a recovery. Given that more mortgages are going to go under water (more owed than the declining market prices of the houses) a Fannie/Freddie bail-out by itself can't raise demand for housing enough to fix the liquidity crunch. Americans have been living beyond their means by using mortgage equity withdrawal (MEW) to finance consumption. Well, MEW is gone and housing prices are going to decline even further. So MEW as a source of consumer spending isn't coming back any time soon either.
The United States has been on a credit spending binge financed by East Asian central banks. That binge couldn't last and it was inevitable that living standards would have to decline in the US for years so that we could consume less, import less, and export more. This binge was made worse by the support that Democrats in particular provided for irresponsible Freddie Mac and Fannie Mae lending and for affirmatie action lending that cause the sub-prime debacle. The irony is that by making it so easy for poor people to buy homes the irresponsible lending practices pushed up the prices that poor people had to pay for housing. If the scaling up of credit availability had been done more slowly it still would have been irresponsible. But it would not have driven up prices as high since supply would have had more time to expand.
|Share |||By Randall Parker at 2008 September 08 08:45 AM Economics Business Cycle|