Saturday, June 4, 2011

Guest Post: Wall Street Journal's Brett Arends - Why Housing is in a Depression

My interest was in this topic piqued by a story on late night TV last night when a story broadcast by the ABC Network mentioned that in the United States around one quarter of home owners had negative equity in their homes.

This led me to doing a little googling this morning where I found the following story on Marketwatch about the sorry state of housing in the US.

I have to state I had no idea that this many people had negative equity, I thought it was just under 10%.

Shame on me.

Now I know little about real estate but what I do know is that this is a very serious situation, for the US and the rest of the world, in terms of the economic fallout, given the sheer number of people in negative equity.

Remember it is what tipped us up in 2008 in the first place and it will continue to drag on the global economy no matter how much printed money the Fed throws at us.

Read on dear readers:

June 1, 2011, 12:01 a.m. EDT

BOSTON (MarketWatch) — It’s official. The house price collapse is now worse than it was during the Great Depression.

That astonishing piece of information comes from the researchers at the think tank Capital Economics.

It follows Tuesday’s news from Case-Shiller that house prices fell again in March, as the double dip gets worse.

Writes Capital Economics’ senior economist Paul Dales, “On the Case-Shiller measure, prices are now 33% below the 2006 peak and are back at a level last seen in the third quarter of 2002. This means that prices have now fallen by more than the 31% decline endured during the Great Depression.”

Hmmm. Recovery? What recovery?

It’s yet more proof that the nationwide financial bust is far worse than Wall Street is pretending, and it may be getting worse instead of better.

But try telling that to the Dow Jones Industrial Average DJIA -0.74% , high as a kite — in more ways than one — above 12,000. What is Wall Street smoking?

Capital Economics says the latest double-dip in housing should come as no surprise. It’s very much following a pattern seen in the early 30s, when a brief recovery also petered out. The same has also happened in other big housing busts around the world, the think-tank says. It believes prices are going to fall even further before we hit rock bottom, maybe sometime next year.

The double-dip in housing, which has left nearly 30% of homeowners in negative equity, increases the chances that the Fed may resort to Quantitative Easing III — although they will probably call it something else, if only to save their blushes.

In some ways, the collapse in house prices is even deeper than Case-Shiller is telling you.

After all, the official data take no account of inflation. During the Depression we had deflation — so while your home was worth fewer dollars, each dollar was more valuable.

Today we have (modest) inflation. If Fed chairman Ben Bernanke gets his way, we’ll get a lot more. We probably need it. Compared to wages, housing is now back to levels last seen in the late 1990s (see chart).

And the Case-Shiller data masks huge variations in housing markets. Prices have collapsed many suburbs, exurbs, rural areas, and in well-known disaster sites like Miami, Las Vegas and Phoenix. Meanwhile the declines have been much milder in places like Manhattan or Boston. Some high-end real estate is actually selling well. The buyers have money.

Is there a silver lining to this? Well, maybe.

If you can get the financing, housing is now cheap. Really cheap. Capital Economics reckons housing is now 24% undervalued, and is the cheapest it’s been in thirty-five years.

With mortgages rates on the floor, and inflation surely brewing down the road, housing in many parts of the country looks like a good deal. But you’ll have to be patient to see the biggest rewards. Capital Economics says, back in the Depression, it took 19 years for house prices to recover to their previous peaks.

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