Roubini is incorrect
by SuperCameron, Sun Sep 14, 2008 at 11:03:35 AM EDT
Kudos to bobswern for his diary on the financial projections of Nouriel Roubini. However, Roubini's projections are wrong. The drop in housing prices will not be 30%; it will be 40%. I base this projection on the historical level of housing prices (3.2 x average household income) and the January 2006 public statement from the mortgage man himself, Angelo Mozilo--
"The housing market has peaked and prices will decline by 40% over the next three years."
That Countrywide would tank came as no surprise to anyone who was listening to it's CEO. Ken Lewis of Bank of America was listening.
If the Fed and Treasury department (read taxpayers and public debt holders) had not intervened so many times, I estimate that we we would be 6-12 more months out from that level now. Instead, massive government intervention has pushed the trough out to 2011, perhaps 2012.
In a mad rush to keep housing prices super-inflated, the Feds have continually delayed the price decline that's needed to make homes again affordable to consumers. This closely resembles the policies of Hoover and Roosevelt that dragged the Great Depression out an extra 10 years. Governments fear lower prices. Consumers who are waiting to buy will have to continue to wait.
In this case, homebuyers will wait out the politicians. They should, because the pathetic efforts our Exectutive Branch (with a go along from Congress) has made to this point are ineffective and contradictory. They can stop this downward drop, but lack the political balls to do it; therefore, they will only delay the inevitable. They hope to delay it long enough to effect the election of John McCain. The Congress could challenge these policies for being as ineffective as they are, but the collective scrotum of our Congressional leadership is also deflated.
The treasury stands poised to bail out mortgage investors to the tune of $100 billion. They may up that ante to $500 billion. Mortgage backed securities form a market of $6.1 trillion in the US alone. The market is international. Some folks estimate it to be above $80 trillion worldwide.
It's hard to describe in words the effect this $100 to $500 billion will have on declining home prices in the US. Fortunately, YouTube has a convenient video on the subject:
Housing prices will drop, stop long enough to consume that $100 billion, and however many additional $100 billions the US Government decides to toss their way. Then, they will continue to drop.
Where will it stop? When real incomes and real savings levels have risen high enough and housing prices have dropped low enough to reach equilibrium. Based on recent trends, I believe that will come around the middle of 2011. This is good news for those who plan to buy a home in the near future. It's bad news for homeowners who experience major medical problems in the next three years. It's also bad news for their surgeons and oncologists. They will have to wait, possibly forever, to get paid for their services.
The way I see it, there are only two humane ways an Obama administration could significantly alter this outcome.
They could enact a plan to seriously increase real wages at a rate only seen for short periods once or twice in the last 40 years. Obama's tax plan may help here, in a small way. It would be far more effective to significantly (and I mean SIGNIFICANTLY) increase public benefits to low income workers, especially those who work full time. Or, they can come up with a plan to cut unemployment by 60%. This is highly unlikely to occur.
The second option is to completely rework our national approach to housing. The right to a sanitary, secure, and structurally sound place to live could be recognized as a human right. Sections of the tax code that subsidize McMansions could be replaced with sections that treat those who choose to purchase modest housing, or to rent, equally well. In short, an Obama administration could push a housing policy based on affordability rather than inflation. This is also highly unlikely to occur, regardless of my personal preferences.
Roubini's 30% projection will have to be revised downward. However, when he states this is only the beginning, he's not far off. The Federal takeover of Fannie Mae marked the end of the beginning. The beginning of the end is much farther off.