Sunday, February 22, 2009

We're In For The Long Haul, In Spite of the Stimulus

Barron's has an article by Alan Abelson that expresses my sentiments better than I could today. Here's the crux:

"House prices, in our bloodshot view, have another 20% or so to fall before hitting bottom and, at the earliest, we're talking sometime next year. And, possibly more important, a meaningful brightening of the current, profoundly bleak jobs picture, isn't in the cards for certainly as long, if not longer."

A sad assessment of affairs, with which I agree.

[Thanks to for the touching image.]

He bases this conclusion on a study by ISI Group (not web-accessible) and its two charts that really tell the picture like nothing else I've seen recently. They can be found on the second page of his article. They are (1) the ratio of house prices to rents, and (2) the median house price divided by median family income.

Both of these long-term lines, drawn from 1975 or before to date, demonstrate with stark clarity that house prices are still on the high downside slope of this bubble.

A majority of people believe that government intervention of the kind our legislators have just put in place can stop this "drop" (read "re-normalization") of housing prices. But this legislation has a good chance of missing the mark, at least as far as arresting housing price falls is concerned. As Abelson says:

"While fewer foreclosures are likely to slow the rate of decline, they won't reverse the downtrend or determine 'where homes prices end up.' ... [G]iven the remorseless rise in unemployment, which, if anything, is destined to accelerate in the months ahead, the simple fact that so many people are too strapped to afford to buy a home, is, we believe, the most formidable barrier to even a tepid housing recovery."

Right on. It's called pushing the string. (See my cartoon on this subject.)

And frankly, I think it would be criminal to deprive us of the benefits of lower prices, whether it be for food, gas, or housing. Lower prices enrich us all.

Personal footnote: I am a commentator, not a researcher. I do not claim to have a Ph.D. in economics. For those readers who would like the academic nuts and bolts under my skepticism, start here, here, here, and here. You will find the deeper research papers accessible on other pages of their website.

Some may object that all of these come from the same think tank, Cato, with its libertarian-oriented research team. This is true. I happen to follow their reasoning on most subjects, having yet to come across a more "progressive" reasoning that can hold a candle to it.

Academics can provide us with some very useful thinking and writing, but they don't have a monopoly on logic. There are many non-academics who have contributed valuable work. There are also academics who have steered us astray. Here are some examples of both:

A few non-academic leaders: Henry George, Mark Twain, Bill Gates (honorary doctorates only), and Benjamin Franklin, to name only four.

Academics who should have had more humility: Robert C. Merton and his economics Nobel Prize partner at LTCM, Myron Scholes; and Margaret Mead, to name only three.

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