It's the Housing Market Deflation

[flashl]

It seems to me that the U.S. economy requires a new orthodoxy, a redirection from consumption toward the stabilization of the housing market and an emphasis on infrastructure. America's economy is faltering because of an exhaustion of free-market capitalism that has mutated in recent years to something resembling a pyramid scheme. Our levered, derivative-based financial system, seemingly so ascendant after the dot-com madness that preceded it, has met its match with the subprime lending and poorly structured, opaque mortgage-backed securities of today's marketplace.

The result has been a dangerous deflation in America's most important asset class -- housing. Preventing home prices from declining even further is job No. 1 for monetary and fiscal authorities. So far, only Fed Chairman Ben Bernanke seems to appreciate the necessity for timely, creative solutions. The Fed has cut interest rates twice in eight days, by one-half of a percentage point yesterday and by three-quarters of a percentage point at an unscheduled meeting last week, and implemented a revised discount window framework in the form of its newly created Term Auction Facility. This "TAF" is designed to lower risk spreads in the high-quality end of the credit markets, and so far it is succeeding. Yet monetary policy has its limits. It cannot make bad assets turn good, nor can it be expected to lower mortgage rates to a level necessary to engender the buying power that would clear the tracts of unoccupied homes and place a floor under the deflating prices feared by American homeowners.

The adjustable-rate mortgage, so dependent on lower short-term yields, is all but dead these days, thanks to increased regulatory scrutiny and the inevitability of future lawsuits. The heavy lifting, then, must be done by the 30-year mortgage, rates for which need to come down at least an additional percentage point before it can stop housing's deflation. With inflation higher than it was during the halcyon days of 2003-04, such a reduction is not likely even if Bernanke were to drop the Fed's target interest rate to its previous floor of 1 percent.

So we do need a fiscal helping hand, and one that is timely and targeted, but current stimulus legislation appears to be aimed in the wrong direction. Granted, a measure that President Bush and House leaders agreed to and that the House approved this week has a provision to allow Fannie Mae and Freddie Mac to back larger mortgages. But that would do little to help those Americans who purchased homes over the past five years and whose monthly mortgage payments are now substantially higher, as well as those people who are being forced out of their homes entirely. Granted, the bipartisan plan would put money into the hands of consumers, helping them pay overdue debt and regain some lost ground from bill collectors. The Senate's proposal to increase food stamp benefits may be helpful as well.

But the big problem with the proposed "stimulus" is that it is really directed toward consumption, not toward the housing deflation that threatens the U.S. economy.

Washington Post

[Warpy]

1. No, it's the maldistribution of wealth

that concentrated all wealth at the top and substituted debt at the bottom. We wouldn't be in this mess if housing were oversupplied due to so many foreclosures of debts people are simply unable to pay on depressed wages.

This is just the new battle in the class war that's been going on since Kennedy reduced the top marginal rate to 70%.

People who are losing all their net worth in houses they still owe money on will be completely devastated if this class war is allowed to proceed. This will become just another plutocratic oligarchy with the moneyed few at the top and the rest of us serfs, our lives valueless.

Economies are built from the bottom up, not from the top down. It's time the Democratic Party realized this. The GOP never will.

[nightrider767]

2. I think housing should be allowed to deflate

For one, it's a free market. Let the market find the real value.

For two, housing prices are out of line with declining incomes.

[ixion]

3. there is no way to realistically prevent a decline in house prices, because they're already

way over-inflated. The price correction must occur for things to get back on an even keel.

It's a big sh*t sandwich brought to you by the BushCo boys, and everyone is going to have to take a bite, as it were.

[JosephSchmo]

4. I'm glad housing prices are dropping

Soon I'll be able to afford one without having to be enslaved for the rest of my life.

[InkAddict]

5. Welcome to DU, JosephSchmo

Enslavement has many masters.

If I could offer you only one tip for the future, sunscreen would be
it.

The real troubles in your life are apt to be things that
never crossed your worried mind; the kind that blindside you at 4pm
on some idle Tuesday. Do one thing everyday that scares you
Sing

Don’t be reckless with other people’s hearts, don’t put up with people who are reckless with yours.

Accept certain inalienable truths, prices will rise, politicians will
philander, you too will get old, and when you do you’ll fantasize
that when you were young prices were reasonable, politicians were
noble and children respected their elders.

Be careful whose advice you buy, but, be patient with those who
supply it. Advice is a form of nostalgia, dispensing it is a way of
fishing the past from the disposal, wiping it off, painting over the
ugly parts and recycling it for more than it’s worth.

But trust me on the sunscreen.

:hi:

[JosephSchmo]

7. Hi Ho

;)

[leftofthedial]

6. capitalism doesn't work

it makes a few people absurdly rich and everyone else can starve if that's what "the market" wants.

concentration of wealth into the hands of the most venal is an extraordinarily bad way to run the world.