The housing market is still bumping along the bottom. As the figure shows, it's not providing any support to the larger economy, as residential investment (basically, home buying) as a share of the economy is stuck at an historical low.
Though policy measures to fix the problem have taken a lot of heat, some of it justified, this is much more a failure of preventive policy than of corrective policy.
The economically lethal combination of financial engineering, drowsy regulators, lousy underwriting, all amped up on fantasies about self-correcting markets, led to a lot of people got home loans they couldn't realistically service. Once the bubble burst and home prices stopped rising, this reality was only further amplified by the the worst downturn in generations.
Add in some unique aspects of housing finance -- the ability of banks holding non-performing loans to convince themselves that such loans will come back to life ("extend and pretend"), conflicting incentives by loan servicers, the banks screwing up the foreclosure process with robo-signing -- and this was always going to be a slow, painful "correction."
Of course, corrective policy could have done more -- the fact that the locus of decision in most corrective policies lie with the banks/lenders themselves has always been a shortcoming. We needed more policies, like cramdown of loans on primary residences, a policy that would have allowed homeowners (borrowers) to take action even while creditors dragged their feet.
There's still good stuff we should do to help modify loans, reduce principal, and cut down the supply overhang -- on that last point, I like this idea to move Fan and Fred's foreclosed properties from the residential to the rental market. Here's a useful article that takes a look at these and other ideas worth pursuing.
But at the end of the day, the main lesson from all this is that when it comes to financial or housing markets, preventive policy is better than corrective policy. The Greenspan Fed got this exactly wrong, arguing that the Fed can neither spot nor stop bubbles.
Regarding spotting, that's demonstrably untrue: foresightful members of the regulatory community and the central bank themselves were sounding warnings early on: Sheila Bair of the FDIC was working with Ned Gramlich of the Fed on this stuff starting in the early 2000s.
Regarding stopping, there's little question in my mind that had we listened to folks like those just mentioned instead of hanging on every word of the maestro himself, regulators could have reined in lending practices that were clearly unsustainable, like negative amortizations, interest-only, and other greatest hits from the subprime slime.
Our best move would have been not to have a housing bubble. Our next best move will be to not have another one.
This post originally appeared at Jared Bernstein's On The Economy blog.
Peter Dreier: California Homeowners Mount a Growing Protest Movement Against Foreclosures
Matthew Dornic: Another Blow to Housing Markets Looms Without FHA Loan Limit Extension
How can the Federal Government create policy, and think of doing thing like unwinding Fannie and Freddie without knowing the value of the homes across the country - on a one by one basis. They could leave TRILLIONS on the table
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http://viableopposition.blogspot.com/2011/09/law-of-unintended-consequences-part-2.html
This analysis shows that both further rounds of quantitative easing and "The Twist" will cause further problems for the world's economy, yet another example of an unintended consequence of Federal Reserve policy.
Curiously, like in the US the quadrupling of house prices never made it to the Inflation Index which was kept under 2% by the Feds (everywhere ... #2 reason we all knew it was unrealistic). Where I lived in 2001 it took 45% of one wage earner to service a mortgage. By 2007 it took 85% of two wage earners ... and the government thought that was kind of ok.
We have other Bubbles or should I say 'sucking' money out bubble ... austerity programs. Why should they be happening in so many cities, regional governments and national ones? Hum ... let me think.
Time for a Great Renewal ... shifting the paradigm and rethinking because this has been no way to run a global economy. Join us http://www.facebook.com/TheGreatRenewal
could have avoided about 60 % of the Losses and most of the Sub-Prime Damage !
Lenders waive Pre-Payment Penalties............................You must be Joking ?
Better to lose one-third of our Investment Banking Resources, Consumer Net Worth and trigger
a Global Depression before the Bankers would lower the cost of Re-Fi's !
anyone with a pulse and paying attention could see the real estate market overheating - buildings going up everywhere with less than 50% occupancy, new homes built on spec by the subdivision, half vacant new shopping centers, empty new office buildings (for what jobs?) people borrowing up to their eyeballs for mcmansions and so forth
The second problem is we have people who cannot afford the house they are in, rather than letting that house go into foreclosure and let these people admit they bought more than they can afford, the government and banks want to bail them out or find another new creative financing way to let them stay in their house. All this does is prolonging the already terrible problem in the housing sector. Let the people’s house go into foreclosure and have them move into an apartment they can afford. By allowing banks to get these mortgages off their books by short selling them and by limiting the number of new home constructions, we can begin to allow the housing market to head towards equilibrium.
Our market in NM didn't get hit as hard as other markets, because we never had the speculative bubble. But my house is still worth 33% less than it was in 2009, when we bought it, thinking the worst was over.
My brother in law is a general contractor, who specializes in backhoe work. The home market here has shut down for new construction, and so has the commercial market. Heavy equipment companies have gone under right and left. When there isn't any work, the competition for it dries up after a while.
I know you love to run your guidance for the entire country on anecdotal evidence, but there it is - the housing market and construction industries have to be fixed - soon - or we aren't coming back from this. It is the "sucking chest wound" of the economy. The patient will die and society as we know it will cease to exist.
Is there a way to look at bankruptcies of heavy equipment and construction companies nationwide, quarter by quarter? Can we even see the damage done to the home construction and commercial construction markets? Can we find out how bad the heart damage is, BEFORE the patient dies?
Thanks again for your advocacy and willingness to endure my silly taunts.
Saying that construction workers need to retrain for a new field is like saying they are being replaced with robots - maybe true in 2050, certainly not true today.
Oh yeah, that is right, this country runs on bubbles, we need to inflate another one.
He says he made a tragic mistake, does not try to blmae ACORN(LOL) or Fannie and Freddie, which were NYSE listed companies(GSEs), run by shareholder elected officers, who dont make loans, just bought loans from Wallstreet and didn't buy subprimes until Bush approved that in late 2004( at the end). Fannie and freddie became a victim just like pension funds and etc who bought Wallstreet junk as did Europe and why the promised ISSA investigations of Fannie and Freddie(taken over again by the government under George Bush), have never happened.
The rest of the repubs are like 3 years olds pointing to thier siblings for the window they broke.
Pls note within 5 years of doing away with the protections implemented under FDR to prevent another Wall Street disaster along with the commodities regulations that were gutted/position limits taken off, we had the next great depression and endlless 400% increases in speculation driving poil and food prices up 300%.... more than in the previous 30 years!
Regards
The only problem is they ran up their debt, by tax cuts at the top which dont stimulate(quite the contrary based on a 30 year history) and they invested mostly in military boondoogles which are not capital investments that will never produce a return or become self funding....
And of course in both cases they deregulated which caused financials failures( s and l) and Wallstreet . which led to deep recessions, while push deindustrializing and outsourcing polices.
Rgards
regards
In many areas, such as Florida,Neveda, Arizona, especially in Condos, replacemnet cost is 3 times higher than what the purchase price is and even in houses prices dropped 70% in many areas.
But yes, demand will not rise till job security and wages rise and peoples credit scores move back up ands prices can still fall in many areas that did not get the 50% or worse drops...
But in the end once the supply is used up, you cant build that new house for anything like the price you pay today when the cost per sq foot of construction is still rising, just liek it is fro autos.
The stock market in constant dollars is at about half of what it was in 2001, when Bush came into office and we gave wallstreet all the deregulation and tax breaks they could buy... and look how that turned out.
Regards
Thing is, right now we need a pound of cure!
What has changed in the last 4 years to get people to buy homes? And worse, what will change in the future?