Friday, July 15, 2011

Dr. Housing Bubble — "The impending slow motion doom for housing"

The real estate market is destined for a slow and painful adjustment for the upcoming decade. The demographic shift and also the reality that the current generation will be poorer than the baby boomers will make it difficult to sustain home values even at current levels. Our economy is largely driven by the financial sector and their asset of choice is real estate.

Yet we are running out of options when it comes to keeping real estate values inflated. We’ve tried artificially low interest rates with the Federal Reserve buying up mortgage backed securities with no natural market demand. We’ve tried tax credits. We’ve even tried ignoring homeowners who miss mortgage payments as a method of artificially keeping supply low. Yet home prices continue to move lower in tandem with lower household incomes. Home prices in the U.S. are now back to 2003 levels painfully retracing a decade long boom. But as we are now realizing, no amount of financial engineering can come up with a free lunch....


Luv Big Guvmint said...

California claims it has cut education spending to the bone. Really?? Perhaps their priorities are just beyond bass-ackwards:

GLH said...

Mr. Hickey:
"Keep in mind that the only reason mortgage rates are at this level is because the Fed has purchased over one trillion dollars in mortgage backed securities."
I understand that Dr. Housing Bubble may be correct about the decade of housing deflation, but is the on reason the mortgage rates are so low because of the Fed? And, why would the rates take off unless inflation increased?

Tom Hickey said...

Interest rates, like almost everything else that people cite an "only reason" for, are complex and many factors influence the price. I am very skeptical of "only reasons" in economics and finance. It's usually the sign of a weak or lazy argument.

Obviously this is not the only reason with the Fed running ZIRP. It also reflects low demand for loans. Whether and how much QE affected mortgage rates is debatable. The Fed's buying MBS in QE1 was to get a lot of dreck off banks's balance sheets.

What he intends to convey is that mortgage rates are at historical lows and even so housing is still in the tank. Interest rates are not likely to stay here for years, but the housing market looks to be clogged for years. Thus it will be more difficult to clear when rates rise. At least, that is the way I would read it.

googleheim said...

The inflationistas proclaim that inflation is nigh - food, market crash, this ... that.

Then they say "interest rates will have to rise."

Again - the proverbially deficit terrorist slogan of the ghost force that pushes interest rates around.

When in fact, as we learned here in this blog years ago - interest rates are whereever the fed sets them out of their own convenience without any mechanism, person, or thing telling or mandating to do so.

if the fed wants to move the interest rates, they can.

that's the whole point.

now do you want to make all those who are bought-into the interest to make more money ?

then raise the interest rates.

it's not clear to me, but if OPEC, Japan, Britain, China, Europe, and the rest of world are "bought-in" into our "debt" - then you would not want to pay out more by raising interest rates.

A tax break for the rich will not spur spending that will save America.

You hear from the libertarians, republicans, nuts in general and tea party no-nothings - the rich will spend America into prosperity ! so give them a tax break.

The TAXES are the way to regulate shadow banking, CDO's, and general wall streeting.

The TAXES will also regulate those who export our jobs permanently, who bash unions, who move corporations to Caymans, etc.

However, maybe we should tax all those who are hoarding U$D treasuries as per those mentioned above.

What can we do to encourage these hoarders to spend their dollars to stimulate the US economy ?

I'd say tax them somehow by any means to get them to spend the money.

Taxes will create new assets by challenging the hoarders to get off the money and find a shelter.

Tom Hickey said...

Progressive taxes are taxes on economic rent. That is why the rich what a low tax rate on upper income and no taxes on capital gains, inheritance, and all other forms of unearned gains.

There is a circular flow in the real economy through the cycle of production, distribution and consumption. There has to be enough money to grease these wheels but not too much so they get gummed up with inflation. Not taxing unearned gains creates demand leakage that has to be offset with larger deficits than would otherwise be needed if the economy is not to contract.

These larger deficits fund the savings of the wealthy, adding to their power and influence, enabling them to capture the system through political contributions, media control, and the like.

The solution, as Michael Hudson has shown, is to tax away economic rent.

Craig Austin said...

Googleheim - i think you asked about engineering analogies before. I went back and modified a diagram that i was working on a while ago. It's a hydroelectric dam analogy to our currency system

Tom - I modified since you saw it. BTW I got some great feedback from erik and changed the language on my issuer user paradigm

instead of fiscal or monetary optimization - eric suggested currency optimization. i thought it was a great idea.

Craig Austin said...

@Tom - I've gone back and read your comments elsewhere on taxing economic rent.

"Michael Hudson is for taxing economic rent — land rent, monopoly rent, and financial rent — as non-productive."

essentially your arguing for reducing taxes on earned income and increasing taxes on unearned income right? Taxing stuff like asset appreciation and income streams from investment properties. Correct?

Financial rent would naturally be lowered if banks were structured properly - they were dependent upon borrowing from government instead of funding themselves by selling off their loans to the private sector and then using the funds to issuer new loans. Correct?

Tom Hickey said...

Craig, there is no fine line that can be drawn between productive, non-productive, and unproductive. I would say to begin with eliminating the unproductive, such as financial "innovation" that not only added nothing of value but also introduced greater risk under the guise of reducing risk.

Regarding land rent. As Michael Hudson points out, do not tax gains from improvements to land from directly investment, e.g., construction. Tax gains that come from location revaluation due to building out, e.g., highways, infrastructure, schools, etc. that is not a result of the land owners' direct investment.

There are different ideas on this. Warren prefers that the first should be eliminated by legislation and regulation iaw his proposals and thinks that taxing land rent is sufficient to get the funds needed to control inflation.

I would prefer to see most forms of economic rent eliminated as a way to preserve liberal democracy from the onslaught of plutocratic oligarchy. I would prefer to see these funds re-allocated to more productive use in public investment in R&D, infrastructure, etc., extending the social safety net, increasing foreign aid to underdeveloped countries, and other ways that benefit everyone including those at the top by making the pie bigger.

Craig Austin said...

@Tom - correct me where i am wrong but i see nothing wrong if the private sector creates new financial products as long as the banking sector is excluded from them. it seems pretty helpful for let's say exporters who want to hedge against against changes in exchange rates or maybe airlines who want to hedge against fuel prices. why? let producers focus on what they do - produce stuff. if speculators want to take that risk then fine. the question is how do should they be able to take that risk? do they use their own money to chase profits and take risk or do they borrow. using their own money seems fine but using borrowed money lends itself to credit bubbles. hey have you checked out the changes to the site? what did you think of the dam analogy - helpful?

Tom Hickey said...

No problem if they have actual productive use, Craig. For example, commodity futures were invented so producers and end users could hedge risk. Then they became predominantly speculative vehicles, and finally commodities became an asset class to be hoard and never put to use. Then, ETF's were introduced further expanding speculation. This leads to real imbalances are well as financial ones. This perverted the original intent and has resulted in commodity bubbles due to excess leverage. Everything beyond actual use is speculation driven in the hope of capturing rent. Use should not be taxed, rent should. Hoarding of vital resources should also be prohibited.

Bob said...

JOBS,JOBS, JOBS, this is the key and will always be the key building block to the economy. There is a bill that can be passed that will permit many Jobs to the US economy and at the sametime provide a win win situation for all classes of people. 47 million people on food stamps, dont need to be econonmically edmucated to see what would happen if the govt stopped paying for food stamps, NOT GONNA HAPPEN.

Boone Pickes Natural Gas bill needs to be passed now and would be law by now if the BP Deep Water Horizon accident didn't happen just at the time of coming to the floor. Pickens is a billionaire, I am not, and many others are less fortunate than me. However all classes of society in the US have a common ground we all want more. To get more we need JOBS. Stop sending trillions to the Saudis and build up our Natural Gas infrastructure NOW. XOM bought out XTO, and Petrohawk was bought out, do you think the Private sector knows something we dont. I am a member of Boone Pickens army and I believe this bill will be very constructive in bringing the US economy back from the brink, I can't feel my face Pelosi and Pickens are major share holders in CLNE, and beefing up this industry will help, as it seems a win win for the bureacrats too. Without jobs all else is moot. The economy does not bow to the master central bank, as the only thing the market loves and follows is easy money. This bill will combine easy money with a constructive build out of infrastructure. Please support passage of this bill if you don't want to pay for the next ski slope in the dessert.

Craig Austin said...

glad you agree. they have become predominately speculative vehicles but by qualifying a productive use for speculation it steals the thunder from critics who say speculation serves a purpose. MMT agrees but we also recognizes the destruction, unproductive potential of speculation that leads to moral hazard, systemic risk, and boom/bust economies. can i get an amen!

Tom Hickey said...

Craig, there is much more to MMT than a description of monetary operations. MMT is strongly influenced by Hyman Minsky, who was concerned with financial instability, e.g, resulting from private debt and excessive leverage. Randy Wray was a PhD student of Minsky.

googleheim said...

I found this on Yahoo news :

""The consequences of America defaulting on its debt are so unthinkable, catastrophic and costly that we should consider anything," said Sung Won Sohn, an economist at the Martin Smith College of Business at California State University. "Sell gold, sell oil from the Strategic Petroleum Reserve, do ANYTHING to avoid a default."


Tom or someone please email this out of paradigm and ask him if he "got MMT ?"

King of Scotland said...

I want:
-Lower Corporate tax rates
-Maintanance of capital gains at the current level
-Elimination of death duties -- why should the government confiscate incentive and wealth? Expecially if the Fed is not spending constrained.

If one attempts to make some lame argument about "the Governemnt gave you this opprotunity/wealth", I say "who created the government?". The government is accountable to the people, not its master.

Jackie said...

I also agree that jobs are they key. If consumers have more money they will spend more which will stimulate the economy plus they will be less likely to default on their mortgages. I also think that the proposed mortgage reforms will also have an impact on the housing market. Many prospective homeowners will not be able to meet the stringent income to mortgage payment ratio of 28% and heftier down payments. As a result we will see more renters.