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Baker predicts home prices will fall another 20% even with the bailout but said the decline could become even more severe without passage of the rescue plan.
Yup. Real home values will still fall to where they were already headed, it will just take a couple of years longer.
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Since November 2009
I think Seattle hit the nail on the head.
dude, i can go out and get a loan rght now for 100k i cant get a loan for 400k if you are under the impression that i cant get a 400k loan simply because wamu doesnt have the capital to be doleing out the bucks, i think you probably think people who smoke grass actually light up their lawns
I think the point of the article shows that there will be continued decline of the the market for at least another year followed by flat prices.
Vp Palin,
If you lend me 1000.00 and I dont repay you. Then the goverment comes in and says it will buy my debt from you for 200.00. You agree to get some cash flow. Are you really going to be willing to lend that 200.00 to me again?
Follow along sheeple.
No, the banks are not going to go out and start making bad loans again. Isn't part of this whole deal a new set of regs for banks, and much tighter oversight on lending? Well? Where do you think all the marginal growth in home values came from? That's right! Giving away free money to people who couldn't pay it back.
Unless that comes back, prices will continue to decline. Just more slowly.
The cheerios here cannot think properly. Do you honestly believe banks will ever see unregulated mortgages as great money making vehicles after almost going bankrupt by them? Do you honestly believe average Joe will see houses as a great investment after so many people got burned?
Houses will go back to normal appreciation, which is keeping up with inflation(after dropping thousands of dollars a year in repairs and updating).
NOBODY knows what is going to happen. The "experts" in the article don't. You don't. And the CNBC talking heads sure don't. Seriously, do they need to have 8 people on air at a time? THat is way too many people! There should be a limit to how many talking heads you can have at a single time.
This bailout works if they provide a way for homeowners who can pay to modify their mortgages to a level they can afford to yank it out of foreclosure. For the flippers and guys who cant afford their homes, they will still have to foreclose.
Bringing the inventory down is the kernel of the whole system.
There will be general deflation as a result of this. You can call me on this statement in 3 years time. Home inventories are irrelevant. I believe the Federal Reserve did this analysis already (link), years ago. Inventory will be irrelevant because the market price discovery mechanism will be distorted, breaking the supply & demand action. This is exactly what was observed in past cases where identical intervention measures were applied. I can draw the graph, it's called deadweight loss on a supply-demand curve. It applies to price ceilings as well as price floors.
Why this plan is different requires extraordinary evidence, otherwise it's all just rhetoric and bail out. I've yet to see this evidence. Nothing would make me happier than to find it.
can deflation really occurr without wages taking a dive? it seems to me, that if people can spend x, and they do spend x, then unless you consider "home appreciation" to be the equivilent of a second job you will still have people charging x... banks have lost wealth, shareholders have lost wealth, retirees have lost wealth... but you dont spend your wealth, you spend your income.
Wage inefficiency theory explains how salaries can stay stagnant yet real wages can fall in a general deflationary environment. The missing variable is employment. Not just unemployment-versus-employment. But a transition from classic-employment to temporary-employment, which has been underway for years now in the US, causes real wages to decline even if nominal wages seem unchanged. The devil is that comes unhinged from Keynesian inflation expecations (ie, deflation makes your wags more valuable).
It could be we enter a long, stagflationary period. I had been predicting that for a long time up until the prospect of this specific bail-out intervention. I believe this intervention breaks the rules such that stagflation will fall to general deflation, with non-core inflation for a short-term period.
you are just making up theories now, there is no Wage inefficiency theory! i googled it, i wiki'd it... every single article came back Ford motor companies, efficiency wage theory
reading between thi lines:
people make x per year under the expectation that they actually work 12 months and if they move away from careers then they risk an inefficiency in their wages where they might make the same 1800 per month but not the same 68k a year that they used to make after their x mas bonus and such?
now its my turn
why does "this specific bail-out intervention. I believe this intervention breaks the rules such that stagflation will fall to general deflation"
if anything this bailout materializes money we didnt have before and injects it into the financials sector(the sector that has shed the most jobs next to construction) if we were heading toward a stagnating economy with above average inflation before, why does this proposal push us towards deflation? because banks will take all their losses upfront?
and dont say "BECAUSE HISTORY TELLS US IT WILL"
I'm not making anything up. I should have said "wage efficiency theory" or "the theory of efficient wages". Google that. It is often just called "wage inefficiency theory" since it's really a theory of how inefficient wages are, not how efficient they are.
It is required to explain stagflation. Stagflation is impossible under neoclassical economic theory without wage theory to explain the divergence.
Your apologies are accepted in advance ;->
How do I explain it without resorting to observed experience? Well, first I'd say to read the paper I linked. It provides models, quantitative, empirical, and theoretical explanations, as well as observed experience.
Secondly I'd simply point to the reduction of credit. Liquidity and credit are not symonomous, and the increased liquidity only increases monetary inflation, not general price inflation. The two are not locked by any magical force, just strongly related. They can, and have diverged. Divergence is usually caused by credit reduction. Just even a tiny reduction in credit vis-a-vis more well regulated lending standards has a massive multiplier into spending on durables (things usually securitized or partially securitized by credit). Just a 1% reduction of credit availability in Japan resulted in something like a 5% reduction of consumer spending on durables. They even lowerd rates to 0% (which results in negative real rates), and still the multiplier overwhelmed any pickup from rates.
The deflation is then cyclical and very tough to break without coordinated fiscal and monetary policy. Namely, lower taxes, higher interest rates (but not high enough to offset tax cuts) and massive fiscal spending projects. And yes, massive runup of deficits. Deficit spending is essential to break this type of cycle once it starts.
I'm not saying it is for sure because the current plan is not baked yet. But as I read it now, it sets price floors, probably implies lower interest rates in the near future, and will result in higher taxes. All that while we've already seen durable real prices fall consistently for the past 7-8 years in every asset category except real estate, which is now fast catching up.
"I think Seattle hit the nail on the head."
That comment by itself gets you your honorary badge of "idiot".
"I'm not making anything up. I should have said "wage efficiency theory" or "the theory of efficient wages". Google that. "
This is the problem with the internet. If you fall back on your educational background, some knucklehead thinks they can learn it in an instant from google. Oops, wrong name, Randy must be wrong because google told me so.
When I was covering virtual worlds and wrote on Second Life's massively overstated "economy", I used the term "market reflectivity". A professional blogger dedicated to declaring Second Life the evolution of mankind, and whose work was regularly picked up by Reuters during the whole Second Life media lovefest wrote in a piece that ended up widely distributed, wrote "I don't know what market reflectivity is and apparently neither does Google, causing one to seriously question whether Harrison is making up other terms of art in his efforts to discredit the [Second Life] virtual economy".
Of course, it was a sort of typo, and I had meant market reflexivity. When I pointed this out to her on her blog, she deleted my comment and banned me from access by IP. But then, that's a whole other problem with the internet. People can just change what they'v said and hide behind self-reinforced credibility. The funny thing was others had already said what I had about Second Life prior to my articles. I was just the first person willing to tie it to my identity and stand behind my work, facing the criticism.
LET ME GET THIS ONE STRAIGHT. HOUSES PRICES WOULD BE BETTER IF THEY LET THE BANKS KEEP ALL THEIR BAD DEBT AND REFUSE TO LEND MONEY?
House prices won't be "better" any time soon, if by "better" you mean higher...
i wasnt really serious, i know you know what you are talking about randy. although i did stumble across a few articles about wage efficiency theory earlier (see i mentioned it in my first post) and they all seemed to be about attracting the best and the brightest and the most motivated staffs and had nothing to do with stagnating wages in a deflationary cycle. i figured it was a typo.
is there any economic theory that says "any growth that is experienced due to credit issued is false"? it seems to me that credit that is taken out and intended to be repaid on a minimum payment basis (some 30 years for credit card amoritization) is never really intended to be repayed at all! i can either live within my means or i cant. if i choose to bury myself in debt, i choose to finance something i cant afford now. THE ONLY WAY that i will ever be able to afford to pay off that debt, assuming i am living on that debt is if inflation or wages make up the 11% interest that keeps me from paying down the debt. my credit balence is never over $100 unless i have already saved the cash precisely for this reason. if your whole paycheck goes toward interest, then by definition that spending should be false. atleast from a wages vs production standpoint.
it also seems like 95% of the entire economy is based on credit issued, which all by itself is scary. do you have any studies or info that would link say the -50s or 60s where people lived off their savings rather than credit with the world today where everyone from the matress salesman to the local nail salon wants to finance you for 6-36 months OAC?
oh and klarek, at least i will do my homework... there exist knuckleheads who will simply controdict you with a "nuh uh" thats why randy likes me better than you
*sticks tongue out
bella... i mean seattle idiot has a point, comparing the bath banks would have taken with the bailout we enginieer it is hard tou understand why credit would be depressed more by the govt buying the bad debt rather than the banks writing it down.
unless you are saying that this trillion would have been better spent building dams and roads and such to fix the construction industry and revitilizing the economy as opposed to evaporating supply side
as for the paper, the math was WAAAY over my head, but from what i could tell the whole paper seemed rather like the quinticential econ paper... "we note it should be like this, it isnt and the reason for that could have been this" and they dont lay out the data, they just say "This data is only available at irregular intervals, but clearly shows a notable decline in ownership by individuals between 1987 and 1993. This pattern suggests that defaults on real estate loans played a role in moving land assets from individuals to corporations after the end of the asset bubble period."
so all i will admit about the paper is that i am not an econ phd and the paper seems to agree with the points you are making although the arguments didnt sway me much
<--that says "simplifying"
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Home prices to decline after big Fed bail-out
fractiousmetal
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"What the government is doing now is not suddenly going to make institutions profitable," he said. "What we're talking about is trying to make them stable. That means removing the risk from their balance sheet and putting it on the taxpayer. The government has a much better ability to hold onto that risk for an extended period of time."
Still, Seiberg is optimistic that the bailout will help home prices finally start to recover since it should lead to lower mortgage rates and improve consumer confidence.
But others say that there are still enough fundamental problems in housing, including a huge glut of homes for sale and the likelihood of more foreclosures in the pipeline.
"It should help housing prices find a bottom but I still think it will be about a year from now -- and after prices decline another 10%," said Stuart Hoffman, chief economist for PNC Financial Services Group.
Nonetheless, even if home prices don't stabilize soon, one expert said the bailout could be a success if it allows bank to stop hoarding cash and once again begin lending to each other, consumers and businesses.
"The one thing you don't want is to have the economy grind to a halt because people can't get credit," said Dean Baker, co-director of the Center for Economic and Policy Research.
Baker predicts home prices will fall another 20% even with the bailout but said the decline could become even more severe without passage of the rescue plan.
"Housing prices were a bubble and you can't stop them from deflating," Baker said. "But [the bailout] might stop an uncontrolled plunge."
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