Friday, August 17, 2007

CEPR "We Told You So" Article

Check out this PDF report from the Center for Economic and Policy Research entitled Midsummer Meltdown: Prospects for the Stock and Housing Markets (hat tip to the Housing Panic blog for the link).

And do you remember this CEPR: Housing Bubble Fact Sheet? You should as I have been linking to it over in the right-hand margin of this blog since 2005. It is worth comparing it to the present article.

Anyway, I'll just cut to the chase and reprint the conclusion of the current report:
Like Japan in the eighties, the United States has experienced a stock and real estate bubble developing side by side. While the bubbles in Japan collapsed simultaneously at the end of the decades, the collapse of the U.S. stock bubble likely helped to feed the growth in the housing bubble. Its continued expansion over the last seven years has led to accumulation of more than $8 trillion of housing bubble wealth.

However, bubbles always create the conditions for their unraveling. In the case of the housing bubble, the main condition is an enormous oversupply of housing which has led to record inventories of unsold homes and record high vacancy rates in both rental and ownership units. This oversupply is already leading to falling prices in many areas. These price declines are likely to lead to a downward spiral as more and more homeowners find themselves with negative equity, which will lead millions to default. At the same time, the growing wave of bad mortgages will lead to a further tightening of credit that will choke off demand, putting even more downward pressure on prices.

The housing bubble was recognizable, as some economists did warn of the potential problem several years ago based on an analysis of the fundamentals in the housing market. However, as was the case with the stock bubble, those who focused their analysis on fundamentals were largely ignored in the media and in policy circles. Instead, many of the most visible voices were explicit bulls on the housing market, and often people with a vested interest in sustaining the bubble. The economy and the country are likely to pay a very large price for this policy failure.
Those vested interests will get you every time. So when do we get to go medieval on their arses?

8 Comments:

Blogger Akubi said...

"What now? Let me tell you what now. I'ma call a coupla hard, pipe-hittin' niggers, who'll go to work on the homes here with a pair of pliers and a blow torch. You hear me talkin', hillbilly boy? I ain't through with you by a damn sight. I'ma get medieval on your ass."

Further Shakespearean thoughts and games can be played here.

Aug 17, 2007, 9:10:00 PM  
Blogger Rob Dawg said...

Take it from someone with one of those accent thingies in the name. That's the storming of the Bastille. 14th July 1789. Hardly medieval.

Aug 17, 2007, 9:17:00 PM  
Blogger Marinite said...

Yes, I know perfectly well it's the Bastille. But it is a perfect pic for a revolution sort of post.

Aug 17, 2007, 10:19:00 PM  
Blogger Edgar said...

It takes backbone to storm the Bastille. Do you see anyone in this country with a backbone?

Aug 18, 2007, 4:53:00 AM  
Blogger Matthew said...

I just read the Executive Summary and will finish reading the rest of this report later, but I have one short, initial observation .... exactly !!

I will say, however, that I am still amazed that housing prices are not factored into our core inflationary data that is used by the Fed to set interest rates..

To me, this is a serious oversight that leaves the window open for more housing bubbles in the future ... Imagine if the basket of goods used to determine core inflation included the price of housing (as a weighted element in the mix) ? If it did, this country's real inflationary numbers would be 10 times what they are reported, which is the reality of what's happened over the past 6-7 years..

I don't know the reason for ignoring housing costs in determining inflation and ultimately interest rates other than I know the more housing costs, the more money the bankers who own them make on the working Joe's who are enslaved to their work in order to pay the mortgage off...

I say BS to the FED's reported inflationary numbers ... Hell, my basket of goods would contain a gallon of milk, a gallon of gas, a pair of jeans, a pair of kid's sneakers, the cost of a haircut, a pound of hambuger, a steak or fish dinner at a restaurant, a box of cereal, quart of OJ, a dozen apples, a pound of almonds, a loaf of bread, a head of lettuce, a 4 door sedan and a 1800 sg foot, 3BR 1.5 BA house in Sacramento...

Why drop off the house if it's my #1 expense? Makes no sense other than there is money to be made by the bankers for doing so...

More FED BS...

Aug 18, 2007, 7:15:00 AM  
Blogger Marinite said...

matthew,

Good point. If housing were included in the calculation of inflation, then possibly official mechanisms would be built in to keep prices down. I wonder how realistic that is?

Do you see anyone in this country with a backbone?

Yes, I do. But most are too interested in trying to play the system as it exists to their own benefit than change things for the better.

We live in a culture today that takes thinking about one's self to an extreme and failure to think about the consequences of ones actions on the future to the opposite extreme. For example, yesterday I was listening to NPR and they had an author on the show. He said that when the baby boomers were young, Californians got together at the voting booths across the state and decided what their vision of California was going to be. For example, they decided that the UC system was a great idea -- a world class university system that was cheap for CA residents. Etc. Of course, these early voters had to decide how best to pay for all their great visions of California. As it turned out, they decided that the way to make California what they wanted was to tax California residents to pay for these great ideas. That was the right and fair decision to make. After all, if we want, for example, a top-notch university system that is cheap for residents, then we are the ones who should pay for it since we are the ones who are deciding to build it. And so it was for a few decades. But then (I guess all the taxes became too high for their tastes) a change came in to play: slowly, year by year, we voted passing on the costs of what we wanted from off ourselves and on to our children and grandchildren with the use of state bonds.

And they voted in Prop 13... great for their "investment" and so their comfy retirement, crappy for their kids.

And so the housing mess is similar. The boomers who stand to profit most from this situation have a track record of not caring for the financial burdens they place on future generations so long as they get what they want and they get it now. Besides, by the time out children figure it out and have the political clout to do anything about it, we'll (yes, I am a boomer BTW) be in our graves.

I think it stinks.

Yes, I am generalizing. I know a few boomers like myself who don't agree with the actions dictated by the majority of our generation. But the majority rules and I think I am not too unfairly characterizing it.

Aug 18, 2007, 11:29:00 AM  
Blogger Marinite said...

For the record, I just updated the content of this post a little. I added a link to this "CEPR Housing Bubble Fact Sheet" which I have been linking to since 2005 over in the right-hand margin of this blog.

http://tinyurl.com/2xx3po

It's one of the reasons why I entitled this post the "CEPR We Told You So" post.

Aug 18, 2007, 11:50:00 AM  
Blogger Tim said...

Good real estate info. Thanks for the read!

As far as the real estate bubble goes, it looks worse in San Diego.
I came across a San Diego real estate broker's blog post that is to be the only one I've seen that does not spout the 'industry line: "It's always a good time to buy real estate." This broker calls it like it is. No it's not PC, but it is amazingly informative and insightful.
Bob Schwartz, the San Diego real estate broker who publishes the blog, wrote a great article back in 2005 that predicted today's huge home deprecation. You can read this article at: San Diego real estate the url is:
http://www.brokerforyou.com/brokerforyou/?p=11

Aug 22, 2007, 11:31:00 AM  

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