Assume for a moment that house prices have bottomed. This still isn’t certain, but it’s looking more and more each day like the bottom is in. The final piece to the puzzle that convinced me house prices weren’t going to reverse course came when Ben Bernanke announced the federal reserve was going to purchase $40B per month in mortgage-backed securities for as long as it takes to make housing and employment to come back. Further, to reiterate his commitment to the policy he stated, “We’re not going to rush to begin to tighten policy. We’re going to give it some time to make sure the recovery is well established.”
You can’t fight the Fed.
Basically, the federal reserve is going to print money until house prices go up. Period. Apparently, it doesn’t matter how long that takes or what other consequences this policy has, the federal reserve is going to do this. Given this new development, in concert with mark-to-fantasy accounting, a zero percent federal funds rate, a cohesive banking cartel restricting inventory, record home payment affordability relative to rents, and a slowly improving economy, it’s difficult to see how house prices can go lower from here; therefore, we are looking at a housing recovery.
I wrote this about the eventual recovery back in 2008 in Future House Prices. 
As with any illness, the recovery is often plagued by symptoms of the disease and unwanted side effects. The recovery from the Great Housing Bubble will be no exception. The main problems will be experienced by those who bought at peak prices and did not go through the cleansing foreclosure process. As painful as foreclosure is to those who must endure it, foreclosure is the cure to the disease of the market. After foreclosure, a borrower is no longer burdened by high housing payments, and is free to move to find new work and spend income on consumer goods.
Houses will become America’s new debtor’s prisons. By the end of 2008, anyone who purchased between 2004 and 2007 will be underwater. Everyone who is underwater and making crushing home payments will be stuck in their homes until values climb back above their purchase price. Since there are a great many people in these circumstances and since each of these people are in at a different price point, each one will have a different term in debtor’s prison, but when their sentence is up, many will opt to sell to get out from under the crushing payments. Each of these people selling their homes keep prices from rising. This is the impact of overhead supply. It is also why the market will not see meaningful appreciation without capitulatory selling. People trapped in their homes cannot move to accept promotions or advancements in their careers, and people who are making large debt service payments have less discretionary income to spend. In an economy heavily dependent upon consumer spending, the impact of this loss of spending power will serve as a drag on economic growth. Aside from the broader economic ramifications, the heavily indebted will need to adjust to a lifestyle within their available after-tax and after-debt income. This will be a disheartening adjustment to many, particularly those who had become dependent upon mortgage equity withdrawal to sustain their lifestyles.
Loan modifications have relieved some of these problems, but they merely extend it for others. Each of these distressed properties represents another unit of overhead supply which will weigh on future appreciation.
Home prices may not return to peak until 2023
By Les Christie @CNNMoney September 26, 2012: 6:15 AM ET
NEW YORK (CNNMoney) — Home prices are showing signs of life, but have a long way to go to make up for losses from the housing bust.
U.S. home prices dropped by a third from the start of 2007 to the start of 2012, according to Fiserv, an analytics firm.
Fiserv forecasts prices will bounce back an average of 3.7% a year for the next five years — a rate that would still leave prices 20% below the peak. At that forecasted growth rate, the national average high of $238,000 would not be hit again until 2023.
Depending on what metric you use, the return to peak could be a few years away or a decade or more away. I originally predicted prices nationally would get back to peak levels in 2018 or 2019.
However with all the manipulation of the market, there is no telling when it will really get there.
It could take even longer in some areas. “In some hard-hit markets, prices could take decades to recover,” said Fiserv economist David Stiff.
Among those facing a long haul: Arizona, California, Florida and Nevada, the states most caught up in the speculative feeding frenzy of the mid-2000s.
Of those four states, Nevada and Florida will take the longest. They had some of the deepest declines, and they have more shadow inventory to absorb, particularly Florida where the backlog of foreclosures is enormous.
In California, for example, home prices should grow a little faster than the national average. Fiserv projects 4.4% gains during the next five years. But the hole is also deeper, with prices having fallen nearly 46% from early 2007 to early 2012. Break even won’t come until after 2026.
This is very similar to my own forecasts from 2008 I made in the Great Housing Bubble:
The bottom was not as low as I predicted, mostly due to a decline in interest rates from 6.5% in 2006 to 3.5% today. Continuation of these low rates may drive prices back up to the peak much faster as well. However, at some point, these rates will go back up, and unless wage increases make up the difference, prices will languish. Lenders won’t mind flat prices, as long as the flat spot is near the peak so they can get out from under their bad loans.
Homeowners in Nevada may have to wait the longest to make up lost ground. Home prices in the state plunged nearly 60%, and Fiserv projects annual gains of just 2.3%. It would take some 40 years at that pace to get back to 2007 levels.
It won’t take that long. House prices there certainly do have a long way to go, but the market is so affordable by historic standards that I believe prices will get bid up much more quickly once the local residents recover their credit and the shadow inventory is finally purged. Nevada will serve as a textbook market for rebound appreciation just as Phoenix is now.
Real estate, of course, is local, and there are many housing markets that never bubbled during the boom. In those places, buyers who bought in 2007 are much more likely to be in the money today. In South Dakota, Texas and West Virginia, prices are already slightly higher than they were five years ago.
In North Dakota, a housing shortage driven by the oil boom has sent prices soaring 17.7% over the past five years.
Iowa, Oklahoma and Nebraska, are nearly back to peak, as are Kentucky, Vermont and Alaska. These were all housing markets that recorded only mild price increases during the boom.
Rebound appreciation
Most housing market analysts are not factoring in the impact of rebound appreciation. Given that we have never witnessed such a crushing home price decline before, this is understandable. However, most forecasters will be proven wrong when the local market residents regain their credit scores and the shadow inventory is cleared out.
Most housing markets hover at an equilibrium somewhere near rental parity. Supply restricted markets like Coastal California always trade at a slight premium, but most markets do not. Rental parity is a strong support level because when prices are below this level, renters have a strong incentive to buy. Currently, most markets around the country are trading at a discount to rental parity — or in the case of Orange County, a discount to their normal relationship to rental parity. In these circumstances, a rebound to historic norms is likely. The deeper the current discount, the larger future appreciation will be until the market normalizes at its historic relationship to rental parity.
Realistically, do you think Las Vegas houses will permanently trade at a 40% discount to rental parity like it does today? I don’t think so.
She spent the house
So many people lost their homes due to their own irresponsible borrowing and spending. It’s a sad reality of the housing bubble. And what’s sadder is that all the bailouts have guaranteed we will repeat these mistakes. Only next time, it will be at taxpayer expense.
- This house was purchased for $390,000 on 8/23/2001. The owner used a $275,000 first mortgage and a $115,000 down payment.
- On 10/26/2001 she obtained a $37,000 HELOC.
- On 4/24/2003 she refinanced with a $400,000 first mortgage.
- On 9/29/2003 she obtained a $20,000 HELOC.
- On 11/22/2004 she refinanced with a $665,000 first mortgage.
- On 12/16/2005 she opened a $123,474 HELOC.
- Assuming she maxed out the HELOC, she extracted $513,474 which included her down payment.
Do you think her salary tripled during the four years when her mortgage did? I rather doubt it.
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Proprietary OC Housing News home purchase analysis
234 AVENIDA VICTORIA San Clemente, CA 92672
$599,000 …….. Asking Price
$390,000 ………. Purchase Price
8/23/2001 ………. Purchase Date
$209,000 ………. Gross Gain (Loss)
($31,200) ………… Commissions and Costs at 8%
============================================
$177,800 ………. Net Gain (Loss)
============================================
53.6% ………. Gross Percent Change
45.6% ………. Net Percent Change
3.8% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$599,000 …….. Asking Price
$119,800 ………… 20% Down Conventional
3.38% …………. Mortgage Interest Rate
30 ……………… Number of Years
$479,200 …….. Mortgage
$107,951 ………. Income Requirement
$2,120 ………… Monthly Mortgage Payment
$519 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$150 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$2,789 ………. Monthly Cash Outlays
($327) ………. Tax Savings
($770) ………. Equity Hidden in Payment
$125 ………….. Lost Income to Down Payment
$170 ………….. Maintenance and Replacement Reserves
============================================
$1,986 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$7,490 ………… Furnishing and Move In at 1% + $1,500
$7,490 ………… Closing Costs at 1% + $1,500
$4,792 ………… Interest Points
$119,800 ………… Down Payment
============================================
$139,572 ………. Total Cash Costs
$30,400 ………. Emergency Cash Reserves
============================================
$169,972 ………. Total Savings Needed
The property above is available for sale on the MLS.
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34 Responses to “California home prices won’t reach the peak until 2026”
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”Basically, the federal reserve is going to print money until house prices go up. Period.”
—————————————————————————————
Problems…
1) The feds models are based on case studies (LOL)
2) Those who receive the newly printed $’s first are the only beneficiaries. That means everyone else loses.
3) Once a market discovers that someone is holding a huge position(s), it typically will sell against it.
#2 from your list is the biggest problem with this policy. Printing money lowers the value of everyone’s currency to the benefit of those who received the printed money.
With the Fed, it’s impossible to sell against their position and force them to move off it. They don’t have stoploss protections in place, and no matter how bad their position, they can always print more money to cover any losses.
Indeed, theoretically, they can always print more money to cover losses. But, when theory (good as it may sound) is in conflict with what you see in front of you, it becomes problematic to stay with it.
Are we still talking about housing, or are we now on religion?
dang. As I was typing, I switched gears–rephrased but didn’t catch. Should read… ‘in theory’ they can always print.
What I see in front of me is rising prices caused by falling interest rates. To see otherwise is to fight the tape. This used to be a big red flag for me because we didn’t know how long the federal reserve was going to keep rates low. Now we know they are committed for at least three years and probably longer, and they are also committed to buying as many mortgage-backed securities as necessary to accomplish their goal. Unless that changes, the Fed will print money to cover whatever they want.
Oh, I totally agree…. they will print, print and print because it’s all they really know. All I’m saying is that it’s not going to have the desired effect.
Hence, my new career in gold and sliver mining. Watch the Discovery channel.
The moment prices tick up, HELOC abuse returns. We have learned nothing from the housing bubble.
Equifax Sees ‘Turning Point’ in Home Equity Credit Improvements
Home equity installment balances rose 0.3 percent in August–-the first monthly increase since November 2007, according to Equifax. The company says its findings signal “a possible turning point in mortgage demand.”
This newly developed trend in home equity credit is highlighted in Equifax’s newest National Consumer Credit Trends Report and bears noting after the home equity credit market plummeted along with property values during the housing downturn.
The total number of home equity installment loans fell 43 percent in a span of four years—from 7.7 million in August 2007 to 4.4 million in August 2012, Equifax reports.
Home equity installment balances contracted even further, declining 49 percent from their $278 billion peak in September 2007 to just $143 billion in August 2012.
But according to Amy Crews Cutts, Equifax’s chief economist, recent trends seem to indicate the residential real estate market has finally found solid ground.
“We’re seeing signs that the contraction in mortgage debt is slowing and delinquencies continue to trend down at the same time that mortgage rates set new record lows on almost a weekly basis,” Crews Cutts explained. “The environment has been set for growth for a while–-now it looks like it may finally be happening.”
While delinquency rates on home equity accounts have been stable in a narrow band in recent months, Equifax says write-off rates accelerated their declines in August. Home equity installment loans were written off at a rate of just 2.69 percent during the month, down 16 percent from July’s write-off rate and the lowest level Equifax has recorded since February 2008.
Looking at home equity credit developments at a more granular level, New Mexico led August’s growth with both the largest monthly gain in loan balances (+2.3 percent) and in the number of loans outstanding (+1.7 percent).
Rounding out the top five states with the greatest percentage growth in loan balances were California (+2.3 percent), Nevada (+2.1 percent), Colorado (+2.0 percent), and Florida (+1.9 percent).
The same states topped the charts for percentage growth in number of loans, but in different positions. Coming in behind New Mexico and the No. 1 spot was Florida (+1.6 percent), Nevada (+1.5 percent), California (+1.35 percent), and then Colorado (+1.3 percent).
Great, housing crack has returned. Boob jobs and gold plated iphones will be common in Orange County. The smart people will take the money out and hide it in their walls.
Happy days are here again…
The twist this time is that if HELOC owner defaults, then its highly probable that the Fed picks up the tab, since they now own 90% of the mortgage market.
The banking cartel are experts at pushing financial crack cocaine.
HELOC abusers are stealing from us all with the government as facilitator.
Foreclosure processing has been increasing in judicial foreclosure states since the settlement agreement was signed. Apparently, they have reached the absorption capacity of the market, so lenders are slowing their foreclosure processing again. Processing these foreclosures is what will make it take a decade or more to get back to peak bubble pricing.
Judicial states slowing pace of foreclosures hitting the market
A growing share of foreclosures in states with a judicial process is slowing the pace of foreclosures that enter the market.
In the beginning of 2007, about 45% of foreclosures were in judicial states. In June, that figure stood at 62%. Analysts at Bank of America Merrill Lynch ($9.28 -0.04%) say this is a result of not just delays from the attorneys’ general settlement early in the year, but also greater efficiency in the disposition of foreclosures in nonjudicial states.
The foreclosure process can take several years to complete in judicial states. About half of loans in foreclosure in those states have not made a payment in more than two years, according to Lender Processing Services ($29.32 -0.1%).
Twenty-four states have a judicial process, including Florida, New York, New Jersey and Illinois. The longest process is in New York, where it takes 1,019 days, followed by New Jersey at 964 days and Florida at 806 days.
While processes vary by state, it takes notably less time to process a foreclosure in non-judicial states such as California, Georgia, Arizona and Michigan.
“The housing market is further along in the healing process in the non-judicial states,” housing analysts at BofAML say. “There was a big bubble and bust in both California and Arizona, which was driven by speculation and overbuilding. The markets struggled with soaring delinquencies and foreclosures.”
Over the past three years, these nonjudicial states aggressively cleared the bad loans, which meant dealing with price declines. This also created more volatility in these states. Analysts cite Phoenix as an example, where home prices climbed 80% during the bubble from 2004 to mid-2006 and then tumbled 55% through 3Q 2011. After clearing a large portion of foreclosure inventory, prices are now rising.
In contrast, judicial states such as New York, New Jersey and Illinois did not have big housing bubbles. From the peak, prices fell 26% in New York and 37% in Chicago. They did not have particularly high delinquency rates relative to the bubble states, but yet there is still a large foreclosure pipeline to clear.
“The bottom line is that, with a growing share of foreclosures in judicial states, the process will remain slow,” BofAML says. “We should not expect foreclosures to shock the market, but we should expect them to remain a steady headwind.”
If you have any doubt about the federal reserve’s intention to stimulate housing, read what the Fed governors are saying.
Housing still impediment to U.S. growth: Fed’s Dudley
(Reuters) – The failure of the U.S. housing market to fully respond to the Federal Reserve’s easy money policies remains a headwind to overall economic growth, an influential U.S. Federal Reserve official said on Friday.
William Dudley, president of the New York Fed bank, acknowledged some improvement in housing of late, but said credit availability remains “impaired” and argued that, overall, the pace of the broader U.S. economic recovery has been disappointing.
“While there are several headwinds that have been restraining economic growth, a key impediment is that the housing market has failed to respond fully to the significant easing of monetary policy,” Dudley said at a residential real estate conference hosted by the New York Fed.
A bubble in the U.S. housing market was at the core of the 2007-2009 financial crisis and the lackluster environment that continues to hamper the world economy today.
The Fed has kept benchmark U.S. interest rates ultra low for nearly four years and has bought more than $2 trillion in large-scale assets to kick-start growth and get Americans back to work. It launched a third round of quantitative easing last month and signaled it would keep rates near zero for three more years.
Many economists believe the U.S. housing market has finally turned a corner as prices have started to stabilize, while home sales were around two-year highs in August. But the large overhang of foreclosures and the many people who are underwater on their homes are among the hurdles the sector still faces.
Dudley, who as head of the powerful New York Fed bank has a permanent vote on monetary policy, said “various housing market indicators have looked somewhat better of late,” including home prices.
But he said the absolute level of housing starts remains low and housing market conditions vary across the country, causing problems. “The net result is that while housing’s contribution to growth has finally turned positive, its magnitude is far below that experienced in previous recoveries,” Dudley said.
U.S. growth cooled in the second quarter to a tepid 1.3 percent annual rate, and forecasters do not think the economy is expanding much faster. Yet in a promising sign for the economy, data earlier on Friday showed that the U.S. jobless rate fell to a near four-year low of 7.8 percent last month, from 8.1 percent in August.
“The Fed has kept benchmark U.S. interest rates ultra low for nearly four years and has bought more than $2 trillion in large-scale assets to kick-start growth and get Americans back to work.”
Can somebody please explain how this is supposed to get Americans back to work? I’m not playing dumb – I’m just not well-versed in business, economics, monetary policy. etc.
Somewhere (maybe here?) I read about something called the ‘wealth effect’, which if I understand correctly is a euphemism for using your house as a piggy bank. If getting people back to work depends on consumer demand, and consumer demand is fueled by HELOCs, then, well, isn’t that simply…insane?
And even if people borrow against their houses to buy stuff, how is that going to ‘put Americans back to work’ when so many manufacturing jobs have left the country?
I don’t get it.
As for my local housing market (Oakland, CA), the mid-tier never fully deflated, and air is being pumped back into the bubble pretty successfully. SFR listings remain more than 50 percent below last year, median price is up around 30 percent (and median price/square foot almost as much). Ninety-seven percent of the 1,100 – 1,200 REOs are being withheld from the market. There are a significant number of flips – often selling for more than double what the flipper paid.
It’s nuts again. Not as bad as last time, but still pretty bad, IMHO.
I think the “housing wealth effect” is broader than just “borrowing from the housing ATM.” When your house’ value is increasing, you have more “confidence” to do many other things that don’t involve borrowing more against it – even the opposite. The housing wealth effect you’re feeling may make you so confident, that you’re willing to bring a large check to a refi closing.
The reflation effect of record low interest rates will be felt most strongly in high wage earner markets like Coastal California, and in particular in the Bay area. Take good wages and lever them up with 3.5% interest rates, and you have a recipe for a reflation bubble worse than the first one.
Is there an Orange County in Spain?
Spain Foreclosures Spread to Once Wealthy: Mortgages
By Sharon Smyth and Charles Penty – Oct 9, 2012 7:51 AM PT
Home foreclosures in Spain, which disproportionately affected lower-income immigrants after the real estate bubble burst, are spreading to formerly well-to-do families and businessmen as they run out of ways to pay mortgages in a deepening recession.
Spanish business people, upper middle class families and their loan guarantors, typically parents of first-time buyers, now account for 60 percent of foreclosures in Madrid, according to AFES, an association that advises homeowners facing repossession. Three years ago, 80 percent of foreclosures were on the homes of immigrants, usually the first to lose jobs and fall behind on loan payments in a souring economy. They now comprise 40 percent of the total, according to AFES.
“Repossessions are encroaching further into the city centers, like an overflowing river,” said Emilio Miravet, head of real estate finance at the Spanish property unit of advisory and investment firm Catella AB. “At the beginning of the crisis, it was homes in the periphery areas belonging to the less affluent that were being foreclosed upon.”
Loan guarantors, often parents who used their houses as collateral to help their children become homeowners when real estate was booming, now represent a fifth of foreclosures, AFES data show. Bloated prices had forced thousands of first-time homebuyers to seek parental help to get a foot on the property ladder, according to Jose Luis Ruiz Bartolome, author of “Adios Ladrillo Adios,” which means “Goodbye, Real Estate, Goodbye,” a 2010 book on the rise and fall of Spain’s property market.
Ministers Meet
Spain’s worsening foreclosure crisis comes as ministers from all 27 nations in the European Union meet today. Spanish Prime Minister Mariano Rajoy will have talks with French President Francois Hollande tomorrow in Paris after European finance ministers met in Luxembourg yesterday to discuss Spain’s overhaul effort and closer banking cooperation as they seek to avert further turmoil and prepare for a summit next week aimed at easing the region’s debt crisis.
Rajoy is struggling to cut a budget deficit and stem crippling borrowing costs while the country copes with its second recession since 2009 following a more than decade long property boom.
“Bank managers, who had aggressive targets to meet, did all they could to lend to those who wanted to carry on buying into the bubble,” Ruiz Bartolome said. “Asking for guarantors became another useful tool to spread their risk and allow them to continue lending right up until the bubble exploded.”
‘Saddest Cases’
Carlos Banos, president of Madrid-based AFES, said parental guarantors “are the saddest of all cases” the association sees. “The kids lose their homes, go live with mom and dad and then mom and dad lose the home that they worked all their lives to pay for because it backed their children’s debts.”
At the peak of the housing boom in 2007, purchasing a home in Spain cost 7.7 times a family’s annual gross income on average, compared with 5 times in the U.S., according to research by Banco Bilbao Vizcaya Argentaria SA (BBVA), the country’s second-biggest lender.
Guarantors were rarely aware of the consequences of backing mortgages. On top of losing their homes, some have had part of their pensions taken away to repay debts, according to Banos.
Spanish home prices have fallen more than 30 percent since the peak, according to Tinsa, Spain’s largest homes appraiser. That’s left about a fifth of borrowers in negative equity, a figure that could reach 25 percent by year’s end, according to Standard & Poor’s. Unemployment, already the highest in the European Union, rose to 24.6 percent in the second quarter, the highest since at least 1976, the year after the death of dictator Francisco Franco.
Spain did everything we did but to a larger degree. Their housing bubble was larger, their loans were stupider, and the amend-extend-pretend is more extreme. The entire population is addicted to real estate with dreams of mortgage equity withdrawal. Their pain is worse than ours, and it’s not over yet.
The US copied Japan except co-signing Italy and Spain. One score later, 40 year old Japanese who never found a job are living at home with mom and dad. Looks like the US is follow suit with the high unemployment. Corrections: since those college grads never found constant full time jobs for more than 6 month, they are not counted as unemployed. You got to just love the US counting method.
I remember reading a story about this years ago. 30 somethings that can’t find full time work being taken care of by their parents like they’re teens. They only work part time jobs to buy things they want.
Builders need to come up with more multi-generational housing to keep up with the persistent unemployment problem. The Italians are well known for their “mama’s boys” still living at home.
IR, your home state might go Republican this election cycle along with Michigan and Pennsylvania. Talk about the complete turn around in 7 days.
If Romney gets a elected it will change housing policies somewhat. How much I’ll just guessing, in the debate he very briefly discussed QRM and Dodd-Frank and the Too Big To Fail banks. However, he’s print policies have lacked some details. But then again you still have the Never-ending Printing Machine, so I think that part of housing equation won’t change.
However, it will generate a lot of news posts over the next year if he’s elected.
A lot can still happen in the last 30 days. It is more interesting now that we have a horse race again.
If Romney wins and kowtows to the banks, there’s no telling what will happen with housing. We might see an escalation of reflation policies with more handouts to big corporations.
181 x rent as historical? Only with low interest. The historical with higher interest was 100 x rents. Some even substracted taxes from the rent before applying the formula.
The formula only hold with a constant rent and tax rate. The calculation is essentially (income – expenses)/investment > interest rate if put into alternative investment + risk fee. Current with the almost zero percent interest the (income – expense) portion is close to zero so the sky is the limit. The 181 ratio will crash with an interest increase.
Is Mitt serious about getting rid of Ben? Or will the Fed just givbe the pres. 3 clones of Ben to choose the next FRC?
Bingo!
Also, it’s fed>banks>Mitt, not Mitt>fed>banks
Yes, the odds of a reformer at the Fed are about zero.
I don’t know if this helps.
Romney’s Fed chief: Who would get the job if the Republican takes the White House?
By Neil Irwin, Updated: Tuesday, October 9, 7:57 AM
Many of the challenges Mitt Romney would face in choosing a Federal Reserve chairman, should he win the presidency, are the same as those that President Obama would encounter: The need to find someone with an exemplary mix of skills as an economist, communicator and financial regulator.
But he would have an added challenge. Romney would need to decide whether he fully buys in to the arguments he has made in favor of a tighter money supply. Is he willing to put the nation’s money where his mouth is?
“The American economy doesn’t need more artificial and ineffective measures,” Romney’s campaign said after the Fed announced its latest strategy to pump more money into the economy in September, a policy aimed at bringing down unemployment. “We should be creating wealth, not printing dollars.” Romney has said he would not appoint Fed Chairman Ben S. Bernanke to a new term when his current one expires on Jan. 31, 2014, about one year into the presidency.
If Romney sticks to his embrace of hard money, it would be a rare event in economic history. Elected political leaders, at least outside of Germany, almost always favor lower interest rates to higher; easier money to tighter. Aides to Richard M. Nixon, Ronald Reagan and George H.W. Bush pressured the Fed to ease monetary policy, and that was at times of significantly higher inflation than that experienced recently. Bush is said to have blamed his loss in the 1992 election on Alan Greenspan’s unwillingness to cut interest rates enough.
So in selecting a replacement for Bernanke, Romney will have to weigh whether he wants someone who will push the Fed to raise interest rates and sell off the central bank’s holdings of assets sooner rather than later, in the interest of preventing potential inflation in the longer term. Does he believe in tighter monetary policy deeply enough to endure the risk that those actions will slow the economy or even tip it into a new recession?
That answer will help determine whom he chooses for the top job at the Fed. Here are some of his primary options. As in Monday’s piece on Obama’s options for a Fed chairman, they are divided into “above the line” (people almost certain to receive serious consideration) and “below the line” (a longer list of individuals who could be worthy of discussion) candidates.
John B. Taylor is a Stanford University economist and a leading monetary economist. Central bankers the world over use his “Taylor rule” as a benchmark to help analyze where they should set short-term interest rates, given economic conditions in their nations. He has also emerged in recent years as a staunch critic of the Bernanke-led Fed’s easing policies and fiscal stimulus efforts. He would, barring a 180 degree change of heart, steer the Fed away from its unconventional easing policies and try to withdraw its extensive stimulus efforts in place since 2008. Taylor does have high-level government experience as undersecretary of the Treasury for international affairs in the early years of the George W. Bush administration. He had a reputation then for a sharp independent streak, which can be a feature, not a bug, in a Fed chief.
Glenn Hubbard, the dean of Columbia Business School, has advised Romney for years and served in the early years of the George W. Bush administration as chairman of the Council of Economic Advisers. His academic background is stronger in tax policy and corporate finance than in monetary policy and macroeconomics, but he has a sufficiently big brain — and credibility on Wall Street and in Washington. He has been more cautious than Taylor in his assessments of the Bernanke Fed, even defending Bernanke directly, saying he should “get every consideration” for another term in an interview with Reuters TV in August. In short, if Romney wants to see tighter money, Taylor is probably a safer bet, whereas it is less clear what monetary policy in a Hubbard Fed would look like.
The remaining candidates are below the line. Any could get a serious look for the job or even get the appointment, but they have significant disadvantages they would need to overcome.
Martin Feldstein is the dean of the conservative-leaning economists, but one who has been passed over for the Fed chair job by the past three Republican presidents. A Harvard professor who chaired the Council of Economic Advisers in the Reagan White House, he is as credible a thinker on macroeconomics as they come. His downsides: Feldstein was a longtime board member of American International Group, the insurance giant that received a massive and massively unpopular bailout in 2008. And he turns 73 next month, making him a bit old for the job (though by all appearances he remains in good health).
Greg Mankiw, chairman of Harvard’s economics department, has advised Romney for years and chaired the Council of Economic Advisers in the George W. Bush White House. He has the economic smarts for the job, but the open question for Romney would be whether he has the political savvy. Also, Mankiw’s writing in recent years has seemed to advocate for Bernanke-style easy-money policies, which could put his views at odds with a new Republican administration.
Kevin Warsh was among Bernanke’s closest advisers during the financial crisis but has distanced himself from the Fed’s unconventional steps to ease policy in the aftermath, putting his views on monetary policy more in line with Romney’s positions. Warsh knows financial markets, politics, the international aspects of the job and the Fed as an institution, though he would be a non-economist in the job of the United States’ economist-in-chief. At 42, he is young for the job and may be a better fit for the Treasury Department in either the Romney or a future Republican administration.
In last week’s analysis of who might serve as Romney’s Treasury secretary, we included the possibility of a “Mystery CEO,” a corporate executive who has Romney’s trust but is not on the radar as a potential political nominee. The same could be said for Fed chief. Call it “Mystery Financial Executive.” The challenge in appointing a Wall Street chieftain to the Fed chairmanship in this post-crisis era is that Senate confirmation would be tough for anyone from one of the banks that received a bailout. And really, anyone from the financial sector would face questions on whether he would be an adequately tough regulator of Wall Street. Fox, henhouse, etc.
If Romney wants to really send a message that he is committed to tight money and combating the too-big-to-fail problem in the banking system, he could consider an unconventional choice. Tom Hoenig, the former president of the Kansas City Fed and now a director of the Federal Deposit Insurance Corp., is among the most vigorous advocates of each: He dissented from all eight Fed policy meetings in 2010, preferring to raise interest rates, and has assailed the Wall Street banks that he sees as a receiving unfairly generous help from the government. Even if he makes Romney’s short list for consideration, the major banks (the executives of which have generally supported Romney) would scream bloody murder.
And now the Dutch…Home of the 1600′s tulip bubble
Netherlands House Prices Dropped the Most on Record Last Month
By Martijn van der Starre and Fred Pals – Aug 21, 2012 2:13 AM PT
House prices in the Netherlands, the fifth-biggest economy in the euro area, dropped in July by the most since the index started in 1995.
Prices declined 8 percent from the same month a year earlier, after falling 4.4 percent in June, national statistics agency CBS in The Hague said on its website today. Values have fallen 15 percent from a peak in 2008 and are back to about the same level as eight years ago, CBS said. Prices had already dropped 5.5 percent in May from a year earlier.
The Dutch Central Bank forecast in March that house prices will continue to drop through 2014 because of stricter mortgage lending rules and a reduction of a homeowner tax break that spurred the lending boom. Values may fall another 5 percent next year, ING Groep NV economists said in a note Aug. 9.
Most political parties, gearing up for elections Sept. 12, want to cut back the homeowner tax break further in some form. The Socialist Party, leading in two out of three major polls, is seeking to abolish it for houses that cost more than 350,000 euros ($434,000). As of next year, the interest payments on new mortgages can only be deducted from taxable income if the loan is fully paid back within 30 years, under an agreement reached between the caretaker government of Prime Minister Mark Rutte and the opposition in April.
Mortgage Debt
The Netherlands’ mortgage debt is among the world’s highest, amounting to 110 percent of gross domestic product, according to the central bank. A 500 billion-euro difference between outstanding loans and retail savings at banks makes lenders reliant on market funding, it said.
Earlier this month, ING reported pretax profit excluding one-time items in its Dutch banking unit fell 28 percent to 233 million euros in the second quarter after higher loan loss provisions and pressure on savings margins. The bank, the second-biggest Dutch mortgage lender after Rabobank Groep, set aside 161 million euros for doubtful loans, up from 90 million euros a year earlier. The mortgage portfolio was affected by lower house prices, driving up risk costs, ING said on Aug. 8.
A “further decline in Dutch house prices and increase in unemployment would lead to higher risk costs on mortgages, but we do not expect a dramatic increase,” Chief Executive Officer Jan Hommen said in a presentation to analysts.
To contact the reporters on this story: Martijn van der Starre in Amsterdam at vanderstarre@bloomberg.net; Fred Pals in Amsterdam at fpals@bloomberg.net
I think one thing most projections miss is that prices tend to overshoot to the upside as well as to the downside. We won’t have a constant rate of appreciation, but rather another bubble in prices that will help California regain the peak quicker than most people expect. Eventually prices will exceed rental parity again, just as they have in the early 80′s, early 90′s, and early 00′s. The next bubble is closer than most people think, and the Fed is doing its part to make it happen.
Sad to say, you are probably right. I see nothing to prevent the next bubble. In fact, we have made housing do desirable, that if the lenders cooperate, buyers certainly will.
OK, Spanish credit rating is almost junk. Spain downgraded to BBB-, which includes a negative outlook by S&P.
The only way the Spanish will ever pay their bonds is if the Germans loan them more money to do so.
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