Best of the Week
Most Popular
1.Crude Oil Price Trend Forecast 2016 Implications for Stock Market - Nadeem_Walayat
2.Odds of Winning Walkers Crisps Spell & Go olidays K, C and D Letters - Sami_Walayat
3.Massive Silver Price Rally During The Coming US Dollar Collapse - Hubert_Moolman
4.Pope Francis Calls For Worldwide Communist Government - Jeff_Berwick
5.EU Referendum Opinion Polls Neck and Neck Despite Operation Fear, Support BrExit Campaign - Nadeem_Walayat
6.David Morgan: There Will Soon Be a Run to Gold Like You've Never Seen Before - Mike Gleason
7.British Pound Soars on BrExit Hopes Despite Remain Establishment Fear Mongering - Nadeem_Walayat
8.Gold Price Possible $200 Rally - Bob_Loukas
9.The Federal Reserve is Not Going To Raise Interest Rates and Destroy Gold - Michael_Swanson
10.Silver Miners’ Q1’ 2016 Fundamentals - Zeal_LLC
Free Silver
Last 7 days
The Worst Urban Crisis in History Could be Upon Us - 24th May 16
Death Crosses Across The Board Are IRREFUTABLE Stock Market Sell Signals - 24th May 16
Bitcoin Trading Alert: Bitcoin Price Stays below $450 - 24th May 16
Stock Market Crash Death Cross Doom Prevails - 23rd May 16
Did AMAT Chirp? Implications for the Economy and Gold - 23rd May 16
Stocks Extended Their Rebound On Friday - Will They Continue Higher? - 23rd May 16
UK Treasury Propaganda Warns of 3.6% Brexit Recession, the £64 Billion Question? - 23rd May 16
Stock Market Support Breached, But Not Broken! - 23rd May 16
George Osborne Warns of 18% Cheaper House Prices - BrExit for First Time Buyers - 22nd May 16
Gold Bull-Phase I Continues to Confound (The Trek to “Known Values”) - 22nd May 16 r
Avoiding a War in Space - 22nd May 16
Will Venezuela Be Forced to Embrace the US Dollar? - 21st May 16
Danish Central Bank Stumbles with Its Currency Peg to the Euro - 21st May 16
SPX Downtrend Underway - 21st May 16
George Osborne Warns of More Affordable UK Housing Market if BrExit Happens - 21st May 16
Gold And Silver 11th Hour: Globalists 10 v People 0 - 21st May 16
David Morgan: There Will Soon Be a Run to Gold Like You've Never Seen Before - 21st May 16
Gold Stocks Following Bull Analogs - 20th May 16
The Gold Chart That Has Central Banks Extremely Worried - 20th May 16
Silver Miners’ Q1’ 2016 Fundamentals - 20th May 16
Stock Market Rally At the End of the Road? - 20th May 16
British Pound Soars on BrExit Hopes Despite Remain Establishment Fear Mongering - 20th May 16
NASDAQ 100, FTSE, and British Pound - When Rare Market Data Screams, Listen  - 20th May 16
Unintended Consequences, Part 1: Easy Money = Overcapacity = Deflation - 19th May 16
The Federal Reserve is Not Going To Raise Interest Rates and Destroy Gold - 19th May 16
Stock Market Final Supports Are Broken - 19th May 16
Gold - Pro-Inflation? Anti-USD? - 19th May 16
Further Stock Market Uncertainty As Indexes Gained On Friday, Will Uptrend Resume? - 19th May 16
What This U.S. Presidential Election Tells Us About Her Millennial Generation - 18th May 16
Stock Market Trendline Broken on Fed Announcement - 18th May 16
An Incredibly Simple, Rarely Used Way to Book 170% Investing Gains - 18th May 16
Statistically Significant Stock Market Death Cross? - 18th May 16
Precisely Wrong on US Dollar, Gold? - 18th May 16
What You Can Gain From One Tech CEO's $355 Million Loss - 18th May 16
The ‘Tide’ has turned… NEGATIVE For STOCKS!!! - 18th May 16
Goldman Sachs's - Regulatory Climate is Chilling Deals; Hatzius Not Worried About a Recession - 18th May 16
Bitcoin Price Remains above $450 - 18th May 16
Crude Oil Price Trend Forecast 2016 Implications for Stock Market - 17 May 16
Could the National Debt Really Grow as High as $31 Trillion by 2023? - 17 May 16
Gold Price Possible $200 Rally - 17 May 16
Crisis Investing - Jim Rogers on “Buying Panic” - 17 May 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Why 95% of Traders Fail

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

© 2005-2016 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