Paulson has proposed that the U.S. pay for the largest bandaid in history, and the New York Times asks, "Will the bailout work?" [Thanks L!] Here’s what they said:
If the plan works, it will attack the central cause of American economic distress: the continued plunge in housing prices. If banks resumed lending more liberally, mortgages would become more readily available. That would give more people the wherewithal to buy homes, lifting housing prices or at least preventing them from falling further. This would prevent more mortgage-linked investments from going bad, further easing the strain on banks. As a result, the current downward spiral would end and start heading up.
“It’s easy to forget amid all the fancy stuff — credit derivatives, swaps — that the root cause of all this is declining house prices,” Mr. Blinder [Binder is an economist at Princeton and a former vice chairman of the board of governors at the Federal Reserve] said. “If you can reverse that, then people start coming out of their foxholes and start putting their money in places they have been too afraid to put it.”
It is important to remember that at the peak of the housing market, there were enough houses built for every everyone–owner-occupiers, speculators, and even their dogs–and no one worried much about the credit worthiness of the dog. In addition, even though builder activity has slowed greatly– they continue to build. Additionally, after the residential real estate boom, we had a commercial boom that put too much space in that market.
A number of factors have slowed the housing market. One, a slowing economy and rising unemployment has slowed demand. Household formation has slowed. Also, we need to remember that the housing market isn’t the only consideration- there is also the commercial market to consider. The demand for commercial space has slowed as well. Two, lending standards have tightened- not only are the speculators and the dogs out of the market, but many owner-occupiers who couldn’t afford homes are in trouble also. Three, and I believe most importantly, there has been a fundamental shift in the way Americans view their homes. It is no longer an "ATM-retirement account-road to riches". It is now a place to live. Granite countertops are no longer an "investment." "McMansions" no longer make sense. This is causing a fundamental shift in the way Americans use their money and their credit.
The goal of the bailout is purportedly to allow credit-worthy borrowers access to the capital they need. Even if that goal is achieved, remember that our pool of homes was built for both the credity-worthy and the uncredit-worthy. There is no longer a financing plan in place for the speculators, their dogs, and the uncreditworthy. Even many of those who were formerly creditworthy are losing jobs and are facing foreclosure. Those homes are going to remain vacant and continue to go into foreclosure- and that will continue the downward pressure on prices. For commercial interests, even the credit-worthy are going to have a hard time justifying projects in glutted markets.
Home prices WILL continue to fall- this bailout will not stabilize the market- and I doubt it will even slow the decline. The same will hold true for commercial projects. Both of these have been built to excess. In an economy where businesses are failing and downsizing, it is clear that there will be a huge excess capacity of commercial space. All of this will weigh on the balance sheet of lenders.
This bailout is a bandaid- and an expensive one. When the value of real estate of all types continues to fall, what will the next bailout look like?
Northern Virginia Housing Bubble Fallout
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Mish's Global Economic Analysis
Ohio Fraudclosure
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What kind of other bailout can a person hypothesize? I’m thinking welfare for the poor instead of the rich next time around.
I just don’t think the American economic model is sustainable in it’s current form. It should be as easy as looking at the outputs and the inputs, crunching a few numbers and taking the sink or swim route. But, with all this personal and corporate greed and overconsumption taking precedence it’s hard to say what comes next anymore.
toysarefun -
I think the consensus is that America’s savers (the fiscally conservative middle class) are the only ones left with money, so the bailout will shake all the spare cash out of them to bail out the rich and the poor.
That is … the plan is to destroy America’s middle class.
unintended consequence are the destruction of the value of the dollar and soaring long term interest. Mortgage rates (conf)up 1% already, FHA doing better up .75% from rates one week ago. (DianaK might be right, we will not see mtg rates below 5 this year)
Gold up 140$ in 3 trading days.
So instead of making homes more affordable, through lower i rates, this Bailout of wall street will hit main street right in the pocket book. Higher cost of money, gasoline prices up 30 cents in 4 days, so inflation is Paulson’s solution.
Coffee -
Yes, and those are some of the reasons I’ve been calling Paulson’s plan The Splurge.
Twist – Huge assumption that prices will continue to decline. I agree that they should and maintain that middle class workers have been priced out of decent neighborhoods. However, I have not seen any evidence of major (read affordable) price declines in any major market. So to all of the experts out there, when can we expect to see these prices declines? My only current experiences are in Denver (almost no price decline) and Miami (not nearly enough, although it seems big!)
Otherwise and as usual, I agree on all points, especially on the house is a home thing, we sold our souls on granite and McMansions.
With high inflation on the horizon…anti-spam word BOOM!
We’ve seen house prices in DC decline by about 15% and then level off for the last few months. Despite this, my wife and I REFUSE to buy overpriced homes just because some knife catchers are still out there. And this bail out plan has us about to exit the buying market all together, we’re so pissed.
If we are any indication of what the conservative middle class is feeling, this plan will not work and prices will eventually not just fall, but crash.
Anti-spam word: burn
h.pylori2-
Nouriel Roubini believes that home prices will fall another 20%-30%, and so do I.
twist -
I think you’ve missed the real problem — it’s the folks we’ve got trying to rein in run-away bond-age
“Dodd, Democrats Question Lack of Court Access in Plan”, by Greg Stohr, Bloomberg, September 22, 2008.
Really should go check out The Onion again. Nobody else seems to have a handle on anything.
Twist,
Is the 20 to 30% base on a national average? If so, then the bubble areas would have to fall further?
John-
OT- but you’ll like this one:
McCain2019s Economic Plan For Nation: “Everyone Marry A Beer Heiress”