The Fed Is Leaning Hard Into a Headwind

Excerpt from Raymond James Economist Dr. Scott Brown's latest economic commentary:

The Fed is making a big bet that inflation will remain in check and has focused more intently on providing liquidity and making sure that credit market conditions improve. It’s leaning hard into the wind.

The biggest danger in the housing market outlook is the decline in home prices, which accelerated through the end of the year. A further decline in home prices threatens to turn an increasing number of recent home buyers (those who bought within the last three or four years) upside down, owing more than the home is worth. A rise in foreclosures will add further to the supply of unsold homes, depressing prices even more, leading to more foreclosures, and so on. Fed Chairman Bernanke has repeatedly proposed that lenders forgive some of the debt of distressed borrowers. At some point, this makes sense. The banks don’t want the home. If an agreement can be reached (the borrower receives some skin in the game, the lender doesn’t take too much of a hit), then both side will be better off. However, lenders are not in the business of giving money away.

Affordability is the key issue in restoring the longterm health of the housing sector. Incomes will improve over time, but home prices may have to decline further to bring them in line with incomes. Historically, home prices have tended to be sticky (they go up easily enough, but are reluctant to come down). However, we’ve never seen such a bubble in housing. Additionally, housing conditions are likely to remain varied by location. Housing markets in the South should continue to be fueled by higher population growth relative to the rest of the country.

Comments

[Purl Gurl:]

Scott Brown writes, in part,

"Affordability is the key issue in restoring the longterm health of the housing sector. Incomes will improve over time, but home prices may have to decline further to bring them in line with incomes."

This crisis in housing affordability is significantly more complex than presented in your article. Home prices have corrected downward an appropriate amount. Wages, adjusted for cost of living, have not adjusted upward an appropriate amount.

As of this date, home prices have corrected a maximum amount without setting off a downward death spiral. Current home prices are a "Goldilocks" just right. Any further drop in real estate value will have her bears eating us.

While your nifty chart shows wages increasing, this is raw data not adjusted for income relative to cost of living. Reality is average wages are decreasing through devaluation of the dollar and inflation. A quick look at energy costs, food costs and health costs, quickly informs us the purchasing power of average wages has dramatically decreased.

Spending by our American people represents about three-fourths of our Gross Domestic Product. While inflation adjusted wages are decreasing, corporate profits are increasing. A vulgar example is Exxon clearing a net profit of forty-billion last year while American consumers are being severely beaten down by gasoline costs and diesel fuel costs. Wall Street crime and greed is eating up Americans’ disposable income; the bears are eating us. As Wall Street financial criminals steal away money from American families, public spending, which supports our Gross Domestic Product, decreases. Wall Street crooks are biting the hands which feed them.

Health costs is an interesting form of greed being somewhat disconnected from inflation through rising energy costs. Last year, my husband consulted with a surgeon, related to minor but needed surgery. Fairly typical hospital, fairly typical surgeon. I timed my husband’s office visit with this doctor. He visited with the doctor for just under six minutes. The doctor billed us $750 for roughly a five minute office visit. This is more than greed, this is outright theft.

While your charts are fancy, those charts do not reflect the true problem. Home prices are no longer a problem having corrected downward. Diminishing inflation adjusted wages are the true problem; raw wages are increasing, purchasing power is dramatically decreasing.

Americans could afford homes if inflation adjusted wages were moving upward rather than moving downward. Home prices are just right. Relative wages are all wrong.

Reality is, the true problem is, a loss of moral values and loss of good ethics. Each time an American looks behind, there is a politician, a Wall Street tycoon or a doctor, looking to pick pockets without one bit of shame.

What is needed is for Goldilocks’ Three Bears to eat those crooks.


Okpulot Taha
Choctaw Nation

2008 Mar 26 08:42 PM

[DanH:]

Sorry, I see no evidence for Purl Gurl's assertion that home prices are "just right." By what measure? As a commodity the price of a home is relative to income (rents). Purchasing power is affected by income. Homes are a value when they approach a price which is 160 times average area rents. Why rents? Because you cannot leverage funds to pay rent, so market prices reflect real incomes. Another way to look at pricing would be to compare potential annual rent for the home you intend to buy, then subtract mortagage/taxes/repair... if you are in the red, you are paying a speculative price.

Prices from 2000-2006 jumped on speculation coupled with easy credit, and outstripped incomes. A correction is inevitable, since easy credit and speculative pricing have vanished. Affordable housing is a good thing, right?

2008 Mar 27 01:38 AM

[Purl Gurl:]

Dan H comments,

"Affordable housing is a good thing, right?"


Stable or lowering cost of living along with improving wages is better, yes?

Dan, your logic is housing should become cheaper rather than workers' average wages becoming better. Yours is backwards thinking.

Home prices have corrected a safe amount. Any further lowering of home prices will have a devastating effect upon almost all American families. What you and others are proposing is causing greater economic harm to the majority so the few can afford homes.

As it is, Americans have lost the greatest amount of family equity in their homes since 1945 year. Should home prices fall more, America will be faced with Great Depression II circumstances. Lower home prices will create economic circumstances of almost none being able to afford homes regardless of how low home prices fall; people cannot afford homes while standing in long bread lines.

American wages can be improved through raising relative purchasing power. This can be accomplished through lowering cost of living, such as energy costs, food costs and health care costs. Our dollar is seriously devalued, inflation is running rampant and corporate America is increasing its efforts at stealing away American families' money while our government effects a domestic economic policy slopped together by a known chimpanzee in the Oval Office.

Real estate prices do not need to lower more and best not lower. Purchasing power of Americans needs to increase.


Okpulot Taha
Choctaw Nation

2008 Mar 27 10:23 AM

["Magazine-C...:]

DanH you are entirely right to point out rent levels as a way to judge when house prices are getting to be a good value to buy. But the actual ratio when calculated very carefully is close to 150. Most of the nation, most cities, are far above 150.

Okpulot Taha, I'm sorry, but the graph in the article is accurate. As you can see, house prices are above where incomes can support them traditionally. Now that we no longer have interest-only, 100% loan to value, etc, we will return to traditional measures. House prices will head back to levels similar to the year 2000 ro 2001.

This is inevitable like a flood of water going downhill. Sandbags won't stop it.

2008 Mar 28 11:39 AM

["Magazine-C...:]

Okpulot Taha, but I should also say that even while house prices in most places in America went above what incomes will support, it's still true that some areas did not rise much. So for example, if an average working family in your area can buy a house under 3 times their annual income, and the price isn't well above 150 or 160 times renting a similar sized house, then house prices in your area aren't too high.

2008 Mar 28 11:46 AM

[Mark in SF:]

"If an agreement can be reached (the borrower receives some skin in the game, the lender doesn’t take too much of a hit), then both side will be better off"

'Receives' some skin in the game? LOL. I tend to think of 'skin in the game' as equity that was EARNED by actual work or investment, not a handout from a lender. Skin the game is what keeps people from taking too much risk for fear of loss. A hand out from a lender is just the opposite! It's rewarding taking on too much risk by getting a hand out! 'Receives skin in the game?!?' I'll have to remember that one.

2008 Mar 28 03:44 PM

[Mark in SF:]

I'm guessing Purl Gurl is a homeowner? Yes of course rising *real* wages would be a good thing, and we can all cheer on measures taken to encourage that. That does not mean housing has sufficiently corrected. Home prices are not a matter of public policy, and any policy that seeks to prop up their value does NOTHING to promote real wealth or real increase in wages. I do share some of your outrage though about the greed being allowed free reign in our system.

2008 Mar 28 03:58 PM