Best of the Week
Most Popular
1.Canada Real Estate Bubble - Harry_Dent
2.UK House Prices ‘On Brink’ Of Massive 40% Collapse - GoldCore
3.Best Cash ISA for Soaring Inflation, Kent Reliance Illustrates the Great ISA Rip Off - Nadeem_Walayat
4.Understanding true money, Pound Sterling must make another historic low, Euro and Gold outlook! - Marc_Horn
5.5 Maps That Explain The Modern Middle East - GEORGE FRIEDMAN
6.Gold Back With A Vengeance As Bitcoin Bubble Bursts - OilPrice_Com
7.Gold Summer Doldrums - Zeal_LLC
8.Crude Oil Trade & Nasdaq QQQ Update - Plunger
9.Gold And Silver – Why No Rally? Lies, Lies, And More Lies - Michael_Noonan
10.UK Election 2017 Disaster, Fake BrExit Chaos, Forecasting Lessons for Next Time - Nadeem_Walayat
Last 7 days
Bitcoin PullBack Is Over (For Now): Cryptocurrencies Gain Nearly A 50% In Last 48 Hours - 19th Jul 17
AAPL's 6% June slide - When Prices Are Falling, TWO Numbers Matter Most - 19th Jul 17
Discover Why A Major American Revolution Is Brewing - 19th Jul 17
iGaming – Stock Prices - 19th Jul 17
The Socionomic Theory of Finance By Robert Prechter - Book Review - 18th Jul 17
Ethereum Versus Bitcoin – Which Cryptocurrency Will Win The War? - 18th Jul 17
Accepting a Society of Government Tyranny - 18th Jul 17
Gold Cheaper Than Buying Greek Villas in 2012 - 18th Jul 17
Why & How to Hedge the Growing Risks of Holding Stocks - 18th Jul 17
Relocation: Everything You Need to do for a Smooth Transition Abroad - 17th Jul 17
A Former Lehman Brothers Trader: It’s Time To Buy Brick And Mortar Retailers - 17th Jul 17
Bank Of England Warns “Bigger Systemic Risk” Now Than 2008 - 17th Jul 17
Bitcoin Price “Deja Vu” Corrective Sequence - 17th Jul 17
Charting New Low in Speculation in Gold and Silver Markets - 17th Jul 17
Bitcoin Crash - Is This The End of Cryptocurrencies? - 17th Jul 17
The Fed's Inflation Nightmare Scenario - 17th Jul 17
Billionaire Investors Backing A Marijuana Boom In 2017 - 17th Jul 17
Perfect Storm - This Fourth Turning has Over a Decade of Continuous Storms to Come - 17th Jul 17
Gold and Silver Biggest Opportunity Since Late 2015, Last Chance at These Prices - 17th Jul 17
Stock Market More to Go - 17th Jul 17
Emerging Markets & Basic Materials Stocks Breaking Out Together - 16th Jul 17
Stock Market SPX Uptrending Again After Microscopic Correction - 15th Jul 17
Global Currency Reserve At Risk - 14th Jul 17
Picking Great Gold Stocks - 14th Jul 17
BBC Tree Expert's Verdict on Sheffield Amey / Labour City Council Tree Felling's - 14th Jul 17
SPX Cycles, Fed Funds and Gold - 14th Jul 17
Should Platinum Be More Expensive Than Gold? - 14th Jul 17
What's Next for US Dollar, Stocks, Bonds and Gold? - 13th Jul 17
India Gold Imports Surge To 5 Year High – 220 Tons In May Alone - 13th Jul 17
Gold and Silver: Your Stomach Is Probably Wrenching Right Now - 13th Jul 17
Gold Industry Is In A Deep State Of Dysfunction, Delusion And Denial - 13th Jul 17
Cryptocurrency Bloodbath! Sell Everything We Were Totally Wrong! - 12th Jul 17
Gold to Silver Ratio - Preparing for THE Bottom - 12th Jul 17
Iran and North Korea: Brothers in Nuclear Arms - 12th Jul 17
Down Dollar Down: Time for "UP"? - 12th Jul 17
Most Tech People Are Too Young To Remember That Silicon Valley Hasn’t Had A Real Crisis In 17 Years - 11th Jul 17
Stock Market Rally May be Over - 11th Jul 17
Silver Price Plunge Is Nearing Completion - 11th Jul 17
Soaring Global Demand for Lithium Presents Triple-Digit Profit Scenario - 11th Jul 17
Gold Price Outlook Increasingly Bullish - 11th Jul 17
Sheffield Street Tree Protestors / Campaigners vs Amey Labour City Council 2017 - 11th Jul 17

Market Oracle FREE Newsletter

3 Videos + 8 Charts = Opportunities You Need to See - Free

Why Falling U.S. House Prices 2011 Will Not Stall U.S. Economic Recovery

Housing-Market / US Housing Jan 12, 2011 - 05:46 AM GMT

By: Money_Morning

Housing-Market

Best Financial Markets Analysis ArticleMartin Hutchinson writes: U.S. housing prices still have further to fall -perhaps a lot further.

In fact, depending upon the circumstances, the additional price declines could be quite steep.

But here's the shocker: That decline won't necessarily cause a "double-dip" recession.


In fact, it probably won't even derail the U.S. economic recovery.

Let me explain.

Anatomy of a Housing-Market Decline
Early in 2010, it appeared that U.S. house prices had bottomed out and were beginning to recover. In April, however, the $8,000 subsidy to first-time buyers ended.

Since that time, house prices have resumed what seems an inexorable decline, which seems likely to continue considerably further. However even in that event, it is unlikely that housing's new problems will do more than stem the overall U.S. economic recovery.

It is now clear that the George W. Bush economy of 2003-07 was a thoroughly unhealthy one. Artificially low interest rates courtesy of U.S. Federal Reserve chairmen Alan Greenspan and Ben S. Bernanke prevented the stock market from bottoming out properly after the 2000 bubble burst and inflated a huge housing bubble. That caused lots of "mal-investment" -to use the term beloved of Austrian School economists -in which houses were built far ahead of demand, and mortgage loans were created that should never have been allowed to exist.

As a result, investment in truly productive enterprise was suppressed, and the country was forced to undergo a huge and painful recession as the "mal-investment" worked itself out. According to Austrian economists, a similar surge in "mal-investment" was responsible for the Great Depression of 1929-41. Following our experiences of the last couple of years, the credibility of this theory has increased considerably.

When the bubble burst, policymakers were extremely worried about the effect that the U.S. housing "bust" would have on balance sheets of big U.S. banks. So they invented ways for this "mal-investment" to continue. For instance:

•Interest rates, already far too low, were pushed down even further.
•First-time buyers were given $8,000 subsidies.
•And various schemes -all of them expensive -were devised to prevent foreclosures.
The result: The U.S. housing market -like the U.S. stock market of 2003 -bottomed out prematurely, allowing home prices to start to recover in late 2009.

Our story doesn't end there, however. Once the subsidies were removed in late April 2010, the market fell back.

Statistics bear this out. The Case-Shiller 20-city home price index dropped by 1% in September and by 1.3% in October. Indexes of mortgage applications fell to multi-year lows.

If you do the arithmetic, you can determine that U.S. house prices are still only at just about their average level in terms of incomes. In nominal terms, prices remain more than 40% above their January 2000 level, having almost kept up with consumer prices since that time.

But there's still a key point to consider. If you look at this from an economic standpoint, January 2000 was not a recessionary period, but the top of a crazy boom. And that means that we can expect housing prices to fall even more -perhaps an additional 10% to 15%, or even more if interest rates back up a long way.

That sounds like a dire prediction, but it isn't. Admittedly, you don't want to own stock in Bank of America Corp. (NYSE: BAC), which acquired a huge portfolio of dodgy home loans when it bought Countrywide Financial Corp. in January 2008. If U.S. home prices were to drop an additional 10% to 15%, it would admittedly create a whole new batch of homeowners who are "underwater" on their mortgages, and tempt even more borrowers to default on their Bank of America home loans.

However, there is no law compelling you to own Bank of America stock. In the long run, the additional home-loan losses the bank is virtually certain to incur will very likely end up as a taxpayer problem. In fact, that's equally true for any future loan losses that will be incurred by Fannie Mae and Freddie Mac, the home loan behemoths nationalized in 2008.

A Look Ahead
The important truth to remember is that -outside the housing market -the rest of the U.S. economy is now looking perkier. The Institute of Supply Management indices both rose more than expected in December, indicating that U.S. growth is picking up beyond its previously anemic pace in the 2% to 3% range. December job growth was robust -the first such report since the recession hit in 2007.

This is not a paradox. The heavy federal "stimulus" spending plans are winding down. Most were wasted, having been designed to provide subsidies for public-sector unions: Their demise frees up financial resources for the private sector -sort of a reversal of the so-called "crowding out" effect.

Now that the government has stopped trying to prop up housing, we can see that the less money that's "mal-invested" in housing, the more that is available for productive investment -particularly for small businesses, which are the main engines for job growth in this country.

If taxpayers and the new Republican Congress are suitably mean with bailouts of housing-related disasters, this trend will continue. In the long run, a U.S. economy that devotes fewer resources to housing and state spending is a U.S. economy that can devote more resources to productive, job-producing uses.

Unfortunately, not everything is this rosy.

The over-creation of money by Fed Chairman Bernanke and his international counterparts has inflated a commodity-price bubble, which will almost certainly bring about inflation. What's more, money spent on oil imports at more than $100 per barrel is also money that cannot be devoted to productive investment. Thus, further increases in the price of oil and other commodities could produce a second "dip" to the recession.

After that, the rising interest rates that are a virtual lock if inflation resurfaces will themselves depress home buying and other asset-heavy investments. However, the inflation itself will tend to support the prices of housing and reduce the real value of debt -both benign developments.

At the end of the day, what we find is that housing's renewed decline is mostly a positive development.

It will cause problems, to be sure. But in the long run, it will produce a healthier economy with more jobs. And hopefully the whole experience will teach us that houses are not a one-way bet (meaning that prices don't only increase -they can go down, as well). Thus, we should know better than to commit the bulk of our wealth to such an unproductive investment.

[Editor's Note: If you like the market insights and investment analysis that stories such as this one provide -but you want to receive stock recommendations, too, take a close look at our monthly affiliate newsletter, The Money Map Report.

Each month, the gurus who write for Money Morning get together and identify the very best profit opportunities you'll find anywhere in the world today.

Our writers use proprietary money-flow indicators to identify and isolate the most timely profit opportunities you'll find anywhere. For more information about The Money Map Report, please click here.]

Source : http://moneymorning.com/2011/01/12/...

Money Morning/The Money Map Report

©2010 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

gAnton
12 Jan 11, 19:45
Don't BANK On It

Reportedly, 50% of bank assets are based on residential loans. Depending on location, the valuation of these homes will probably fall 10 to 50% in 2011, and many, many more properties will go "under water". A large but unknown number of these banks are now in trouble or borderline.

If residential real estate were the only problem area, everything would probably work out okay. But the economy is now a real minefield, and the existence of a huge shadow inventory and falling prices makes intelligent people reluctant to invest.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife