Wednesday, October 19, 2011

Housing at Core of Economic Malaise

Today's NY Times addresses the role housing is playing in the current downturn in its article Gloom Grips Consumers, and It May Be Home Prices:

That has led a growing number of economists to argue that the collapse of housing prices, a defining feature of this downturn, is also a critical and underappreciated impediment to recovery. Americans have lost a vast amount of wealth, and they have lost faith in housing as an investment. They lack money, and they lack the confidence that they will have more money tomorrow.
I've discussed this changing perception of home ownership in previous posts.  While I don't want to sound callous to those who are struggling, I think this shift in attitudes will be a strong positive long-term, although it will cause lots of people pain in the nearer term.  Home owners - new and old alike - need to view their home as a shelter, not an ATM and not a stock that goes up and down.  I think first-time home buyers likely get this while prior generations will have more trouble accepting it.
“I don’t know that it’s going to get better. We just have to get used to it,” said Sherry DeWeese, whose home in Ocoee, a northwestern suburb of Orlando, is worth less than she paid for it 13 years ago — and about a third of its value at the peak of the market. “It was nothing to buy whatever we wanted. Now we just think about what we really need.”
Sherry gets it.  While it is sad to hear her house is worth the same now as it was 13 years ago (the NY Times doesn't specify, but I'm guessing that is in nominal terms, meaning she has actually "lost" money on her home in real terms due to inflation).  Is it perhaps more striking that her home has not changed in value in 13 years or that it was worth 3x its current value at the peak?

It remains the prevailing view of economic policy makers that economic activity will eventually return to the same trajectory as before the recession. Mr. Bernanke and others have said that they see no evidence of any permanent change in the economy. Previous bouts of economic pessimism, as in the early 1980s and early 1990s, went away once growth picked up.

There's been a lot of discussion around the idea of the "new normal" and whether it will remain in place.  Will people remain frugal even after the economy has rebounded and their jobs are more secure?  I think that is a toss up - we as Americans do tend to like reality TV, celebrity culture, and all these other influences which tend to make us want to spend and own more.

Can we return to the same level of economic activity (consumer spending) as before the recession?  I doubt it and I hope not.  Many or perhaps most people didn't over-extend themselves, but everyone has been caught up in the recession.  Those that did spend in excess have likely had a harder landing.  I tend to believe that the experience of the past few years won't simply be shrugged off.

I do fear the government's involvement though.  The current and previous administration, along with the current and previous Fed created dangerous situations.  The current Fed wants to keep interest rates artificially low to drive lending and grow the economy.  The key, in my opinion, to being successful in this regard, is to turn off the spigot at the right time.  Failing to do so will lead us back into an environment of easy credit and the bad decisions that follow.

No comments:

Post a Comment