Economy Worse Than Previously Thought?
By Justin Gardner | Related entries in Barack, Business, Economy, Money, VideoThe Housing and Consumer Prices report came out yesterday and showed two extremely alarming trends.
First, this 18.9% drop is the biggest on record, and that means that home prices will continue to fall like a rock.
Second, consumer prices dropped 1.7% meaning that deflationary is only getting worse and there’s certainly no indication it will stop any time soon.
MSNBC has more…
Now, the Fed is trying to stem this by dropping interest rates to the bottom of the barrel, but who knows if that will work.
That stimulus package can’t come quickly enough.
This entry was posted on Wednesday, December 17th, 2008 and is filed under Barack, Business, Economy, Money, Video. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
December 17th, 2008 at 7:19 am
I doubt any government stimulus or interest rate cut will be able to solve the fundamental cause of our current economic woes: Too many homeowners are overextended on their mortgages.
Home prices got away from their long term trend line because of the exotic types of mortgages (interest only teaser, option ARM, no money down) that created an illusion of affordability allowing ever-increasing “bubble” prices. This was combined with relaxed lending standards allowed primarily because real estate was seen by the bankers as an easily reposessable safe asset that couldn’t really drop in value, and ever-increasing home valuations fed home equity lines of credit that allowed these homeowners to fuel the economy (which is 80% consumer spending) for the last 5-10 years.
These exotic mortgages and relaxed lending standards are gone forever. After subprime, they are now seen as toxic to the banks and the feds might even make them illegal in the future. Now that homebuyers must once again buy using the conventional fixed mortgages w/a 10-20% downpayment that used to be the only way to purchase a home, home prices must adjust to their long term tendline to return to affordability. For this reason, attempts to restore house prices are wrongheaded and doomed to failure: the prices cannot be restored without restoring the untenable exotic mortgages that allowed the prices to rise in the first place.
This means a drop to 2002 price levels in most regions, which can be as much as a 40% drop in certain parts of CA, FL, NV, and AZ. Meanwhile, those formerly living high on the HELOC hog now find their equity has evaporated, and others who couldn’t afford their homes without exotic teaser rates or interest-only “pick-a-pay” payments find they can’t refinance or sell when the piper is due.
As this process continues, the air is literally being sucked out of the economy as banks lose large amounts of money due to foreclosures leaving them with assets worth far less than the original loan value, while the ex-homeowners find their credit (and thus ability to participate in the economy) is impaired, and some desperate remaining homeowners throw all their money at paying their mortgage after it resets to the non-teaser payments. All of these things manifest themselves in the current situation where banks are broke and consumers aren’t spending.
Thus, I think unless we have a major federal bailout of homeowners, I think this pain continues until house prices bottom and all the bad debt is worked out of the system. Unfortunately, that process of bottoming is deflationary and will feel like the great depression until it ends.
This being said, I think a massive bailout of homeowners is unlikely to be realistic because the amount of money needed to correct the situation is likely tens of trillions of dollars, and not even the Federal Government has that kind of money.