I find it fascinating that everyone assumes the economy is on its way to recovering. There are still some bad housing problems that are not resolved. Wouldn’t you think the inability to predict the current state of the world would give people pause about the ability to predict tomorrow’s?
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Fair enough…they seem to be going on a superficial index (number of jobs lost per month).
Here, in the Bay Area, the median home prices have gone up for two months in a row. In good neighborhoods, homes get multiple bids, often offering higher than offering price. There are some neighbourhoods where prices are still going down. I just saw a house get listed a at an attractive price of $850,000 last Saturday, and by monday they had 9 offers with highest being $940,000. I am sure they will get a few more.
However, these are all folks who are betting on a quick recovery. I get this feeling that people have learned nothing from the recent housing debacle. If history is any indication, one would expect housing to be one of the least loved/liked sector when the recovery starts – but the local evidence points to just the opposite. Which is to say, recovery might just be a mirage.
There is also the issue with the 5 year ARM loans resetting. From anecdotal evidence, there were lot of these issued in 2005-06. I know of a few who took out these loans. In fact a couple I know took out 0 down 5 year arm on a $750,000 house in 2005. There were two similar houses in his neighbourhood that were sold for $520,000 and $540,000 in the last 6 months. Even if prices are up 10% from those panic lows of early this year, He is still underwater by about $150,000. I am not sure if he will find a willing lender to refinance his underwater house. He will have to come up with that 150k + a 10% downpayment. My friend might be able to do it, but I am doubtful that most ARMers will be able to pull it off. This is one good reason that I am still staying out of the housing market. I personally think that this recession will have a second dip in 2010 – may not be as sharp as the dip of 2008, who knows.
Moreover, I think all these inflationary fiscal and monetary policies will come home to roost next year.
I have a sneaking suspicion that Obama is the next Jimmy Carter? or is it Richard Nixon?
Addendum:
I have also heard that banks are holding onto some of the foreclosed properties, anticipating higher prices in the near future. If true, I see this move as suicidal on the part of banks. Not only are they keeping a non-performing asset, they are also losing money to property taxes. With no one living in these houses, weeds growing all over, critters, roaches and spiders are making their colonies in these properties. In the end, I am afraid, all these houses might hit the market, all at the same time – putting pressure on prices.
Forget banks not allowing forclosure to hit the market you have states that are keeping them from the market. Intersting that these places also happen to be where state pension funds invested heavily in RE.
We also haven’t seen the real downturn in commercial RE. Many office parks are looking empty and companies who’ve downcided still can’t find people to sublet. Malls and shoping centers face extremly high vacancy rates, and most ofthe loans on such properties never recurve payments against principal, they just roll into a new loan.
Historically speaking, prices should hit thier bottom until 2012, and that’s if we don’t pull a japan. This rally has changed somepeoples perception of our current situation, but I’m not so sure it’s for the good. last thing we need is to go back to our old lifestyle of living on credit, so I guess we can still be happy that as of the recent numbers Americans (sans the gov’t) have actually decreased their outstanding debt…albiet it is a small amount manily due to bankruptcy and a decrease in credit demand.
Like Rom says, take advantage of a crisis…maybe the Austrian can do it this time.
Anyway, people have been making bets since forever,whether it be palying cards or buying stock. Seems inate in the human mind to want to create a plan of what the future will look like, just always seems to be the idiots who are the loudest.
But
The market rally,
I recently read that in Richmond, Ca (a Bay Area city north of Berkeley) banks own about 350 foreclosed homes, yet only 15 of these are on the market.
I think you may be confused about how ARM’s work. When interest rates are low (as they are now) ARM’s are great. You look forward to getting your rate reset. My three year ARM just reset for the second time, and I am now paying under 4%. Also, in calculating how far underwater your friend is, you are not factoring in his monthly principal payments. It sounds like housing prices in the area have bottomed out, and so with each monthly payment the amount he is underwater will steadily decrease. And next year he will have no reason to refinance, his rate will simply reset, and probably to a lower rate. I know the media has relentlessly hyped the danger of ARMs, but the reality is quite different. Clearly there were subprime ARMs issued that are much more problematic, but most of those have already blown up.
At this stage in the game, we need something to hope for! Belief is reality, provided everyone is on board.
But the Anointed One appeared in the Rose Garden to tell us things are getting better.
If we are in the early stages of a recovery, maybe someone can tell me what sector is leading us out of the recession. Construction? Consumer spending? The only sector that seems to be adding employment is the govt. Maybe Obama + company figured out that if we keep adding to the govt sector, the private sector will recover. I wish Larry Summers + Christina Somers will explain it to us.
“Wouldn’t you think the inability to predict the current state of the world would give people pause about the ability to predict tomorrow’s?”
Russ, businesses make decisions about the future. (Consumers, too, but let’s focus on businesses.) My clients are wondering about staffing levels, inventory levels, new capacity, and whether they have adequate financing in place to accommodate an increase in orders. Do you recommend that they just throw up their hands and say, “We can’t forecast!” If they don’t have a view of the future, how do they figure out what to do?
I’m afraid you are channelling that Austrian stuff that says we can’t forecast, because the Austrians can’t imagine forecasting for any other purpose than trying to manage the economy. (Henry Hazlitt at his worst.) But the private sector makes forward-looking decisions, and that implies a view of the future. Don’t criticize those of us who try to help companies do that, unless you have a plan for making decisions that does not imply a vision of the future.
I concur with Bill’s comment in general. Predictions have to be made. When you make a get a loan, buy a stock, choose a college you are making predictions. I take Russ’s point that things change and predictions have uncertainties, but that does not mean that we don’t have to take actions. What all our poor judgement powers added up to is the order that Hayek talks about.
I personally still stick to the US vehicle miles traveled put out by the FHWA to judge assess the past economic activity and assess trend lines on where the overall economy is going. My one variable model tells me that our ship is no longer taking on water (currently). However our hold is pretty darn full of the stuff we don’t want.
http://www.fhwa.dot.gov/ohim/tvtw/09maytvt/09maytvt.xls
I don’t give credit to Government action for our improved current trajectory, and future taxes that will be necessary to pay for all the clunkers that are now smashed will slow down growth that we could have expected in the future. So I am glad for the current trend and understand the work to create a quality order for the future.
Businesses have to make decisions and do them quickly. I would imagine that it is a whole lot less complicated than forecasting the economy. But they also act in uncertainty. Bad businesses fail. Government’s are a different beast altogether – they tap into, seemingly, an unending reservoir of slave labor. They almost never cut back, or they almost never go out of business.
How well did those businesses do? They essentially gambled and most of the lost. So it stand to reason that even if they had to make a decision, they can be wrong. Just curious since you deride the Austrian school, how well do you think the REH school or Keynesian school does to predict what happened? Like I said, seems to me that they were horribly wrong, whereas anyone this any knowledge about the Austrian school could see this coming a mile a way. The government induced bad investment by tampering with the interest rate. Prices give out a wealth of information, and since the interest rate is the price of money, it stand that there is a huge amount of information in the interest rate that business will need to make an informed guess. Austrians know this.
Can you predict what Ben will do with the Fed Funds rate next week? Or a month after that? It stand that if you can guess correctly you stand to make a lot of money, but there is no science to the guess. Some business will guess correctly, most wont, and the ones that don’t will pay for it. That’s of course unless they give enough money to Dem campaign funds by then.
Russ,
You like Higg’s “regime uncertainty” arguments; well, here is one that is hopeful: Since Obama is much like FDR in creating this type of uncertainty, the fact that his stock is falling faster than Enron’s means that the seriousness of the uncertainty he induces is also plunging. Take a look at the betting markets on the 2010 mid-term Congressional elections.
I don’t believe it’s getting better. I think it’s getting worse. Even the great depression had some fool’s rallies. My belief is based on the business cycle and capital theory of the Austrians. The mal-investments are not being liquidated in the market, they’re being propped up and due to all the spending, more mal-investments are occurring for the next bust.
The sad thing is most of the bailout money that congress passed hasn’t even been spent yet. It will get even worse when that money comes into the system. I don’t expect epic doom like some of the Austrians, but I do expect stagflation worse than the 1970′s.
There’s too much money being spent on too many stupid things: Iraq and Afghanistan wars as well as (relatively) smaller military excursions into Pakistan; bailing out bad manufacturing companies (GM, Chystler;) bailing out criminal Wall Street firms; not to mention a healthy dose of protectionism plus cap and trade that will only serve to further strangle the economy. All of these things are money down the toilet. There’s also the possibility of (even more) socialized medicine.
I don’t see any reason to thing a recovery is occurring.
So, are you trying to imply that rising taxes and the tightening boa constrictor of regulation is somehow unlikely to lead to economic growth?
You should tell Mark J. Perry that he’s been wrong for months.
Also, Abby Cohen of Government Sachs has just declared that this is the beginning of a new bull market. So…..
Perhaps they are confident in their predictive ability because they have a blind faith that spontaneous order will take care of everything.
–Pingry
Pingry is starting to sound a lot like a tarot card reader or a psychic.
C’mon Russ, obviously the new market indicator is number of Barney Frank tantrums on camera.
People are always putting “words” in his mouth…… http://www.youtube.com/watch?v=M3jYIFMqcdA
That was completely inappropriate.
What fascinates me is that so many people believe these phony government statistics such as the unemployment rate. The true unemployment is much, much, higher than 9.4%. Shadow Stats puts it at above 20%. On the surface, the only real reason why the already bogus “official” unemployment rate went down was because the numerator (i.e. # number of unemployed) decreased because “discouraged” workers aren’t counted as unemployed.
True, but the BLS does produce the unemployment rate with discouraged workers… it’s not like they’re hiding it. Although the shadow stats definition of discouraged workers is slightly broader than the BLS’s definition. I think as long as you know what the number is measuring, it’s fine. Just don’t expect it to measure aggregate pain in the economy.
This is why Brad Delong always reports work hours on his website – for the problem with discouraged workers that you point out, but also because employed workers could be underemployed (even if that means just cutting down from 40 to 35 hours a week). That’s something that even shadow stats doesn’t track – but again, the BLS produces it.
I think the economy is on it’s way to recovery. The only thing that can stop it is the government. That is the greatest unknown we face at this point. People will either pay off or be forgive of their debt, begin to spend, and the economy will turn; or the government will get in the way of the economy and prevent it from the recovery that would otherwise happen. I suspect the economy will recover in spite of the governments attempt to prevent it from doing so. I don’t mean that literally of course.
At some point, “the government” is so large and intertwined with “the economy” that a distinction between the two is hardly meaningful. When the government is the economy, “only the government can stop the economy” is nonsense.
Debts are not “forgiven” by beneficent creditors with Christian charity. This linguistic formulation is only part of the self-congratulatory Big Picture of creditors and statesmen, insofar as the distinction is meaningful. Bad investments are recognized and written off.
If the debts were “forgiven”, no foreclosures would be occurring, no one would be declaring bankruptcy and statesmen wouldn’t be cajoling creditors, with both sticks and taxpayer provided carrots, to “forgive” debts. “Forgiveness” is given, not taken or ordered by a third party.
Who will forgive the exploding volume of Treasury securities? Who will forgive the looming obligations, both “funded” and “unfunded”, of the Social Security system, state and federal pensions, Medicaid and other programs? Incredibly, the Social Security “trust fund” is in the “funded” category, and that incredible promise to raise tax revenue is only the tip of an iceberg.
martin,
Wouldn’t you agree with me that “specialness” is not for the general public, it is only for the politically connected or the wealthy who can afford political cover? Did not special people get special terms in loans from Countrywide et. al? Just not you and I.
Furthermore, “forgiveness” is not for the general public, forgiveness is for the politically connected or wealthy who can buy the politician? With that reality in mind, do you suppose that there are debts being “forgiven” (erased) for some, (many?), just not for we the hoi poloi.
Not in the sense you apparently mean. The politically connected benefit from political largess, and the politically connected in this sense can hardly be everyone, but the politically connected aren’t limited to Bushes and Rockefellers. These very wealthy people are politically connected, but other classes of superficially more “common” people are probably more significant, like Federal civil servants, career military and other state employees.
A 30-year civil servant retired at 55 could have a generous pension adjusted annually for inflation, the yield of special Treasury notes with an above market yield in the Federal Employees Thrift Savings Plan and generous health insurance benefits, plus Social Security benefits after age 65. This person might live down the street from you and drive the same car you drive, but he’s not like you, because you are not entitled and may not be entitled to the same benefits.
Because these other “special” people are far more numerous than the Rockefellers and Bushes, their cost to the non-special could be much greater.
Well, I didn’t get any special terms on a Countrywide loan, but many apparently “common” people did, and some of these people continue to benefit from bailouts that I’ll never receive.
Not necessarily. The politically connected have many motivations. They’re certainly self-interested, and they may perceive their self-interest in granting benefits to “common” people, but since they can’t benefit everyone by taxing everyone, their policies can’t really benefit common people. The policies can only convert “common” people into more privileged people. This transformation of the common into the special is never ending.
I prefer “erased” to “forgiven” for the reasons specified, and I agree that the erasures ultimately cannot benefit the masses except insofar as the masses are indebted and all have debts erased, and that’s not really happening.
So I take your point, but we need to be careful who we’re calling “wealthy” and “connected”, because the usual suspects don’t remotely exhaust the category, and the most notorious villains aren’t necessarily the most costly.
Wouldn’t Bryan Caplan regard these comments as examples of pessimistic bias?
Good economic news is all about passing President Stupidly’s health plan. The narrative goes that they fixed the economy, so of course they can fix 1/5 of the economy.
Are you saying we need another stimulus package?
Actually why won’t the economy recover? The stock market crash of 1987 was worse than the 1929 one. I’ll start worrying when I see Americans leaving the city for the country in a mirror image reversal of the Industrial Revolution. When the economy so bad that people have to ‘reboot’ society and start afresh from family farms and slowly rebuid society would amount to economic collapse to me. When cities are vacant except for scroungers dismantling car wrecks to make ploughs whilst skyscrapers topple from lack of maintenance then I’ll say the economy has collapsed. The current mere hard times in the West is still opulent living for people in the Third World.
Good points all, Gil, but that doesn’t mean things aren’t perceived as painful for those who have no first hand knowledge of the third world.
Unfortunately in the long run far and away most people tend to act on their perceptions not on their intellectual understanding, it is an enculturated knew jerk reaction that comes before thinking.
There are many educated people that seem to believe we’re recovering solely because they don’t hear about the financial crisis as much in the news, but there are also intellectuals saying that the economy is on it’s way to recovery because they feel it’s the only alternative to saying we’re on the brink of destruction, monetary collapse, human sacrifice, dogs and cats living together, mass hysteria, FED/ECB representatives feeding on ashes of civilization, etc.
But I do believe there is a reasonable position to be held between both..
Good quip!
Wow – you’re listening to more positive news sources than I am, apparently. The jobs data was good news, but only in the sense that one percent drop in GDP was good news… ie, not really good news. I’ve heard they’re not expecting unemployment to start declining until spring of next year. This is already the longest recession since the Great Depression. That doesn’t sound like good news to me
Ummm….perhaps you have not been paying attention to the stock market (which some people in government think is the economy, but we won’t mention Mr. Bernanke and Obama by name), but….good news is good and bad news is even betterrrr!! Rock on.
[totally sarcastic]
The question is: what’s a “recovery”? I suppose the economy is “recovering”, because the fix is in. Many home mortgagees are still underwater, and foreclosures will continue for some time, but so what? Unemployment will peak and decline, because ample entitlement to employ idle labor on credit exists. The new organization might be no more productive than the former, even less so, but we’ll be busy, and our business will suffice to feed, clothe and house us. That is recovery.
Furthermore, the official “inflation” statistic will continue its inexorable trend toward stating a lower figure than previous formulations of the statistic, so “inflation” is “under control”, under the control of the people defining the official formulation that is.
Move forward, do your best work, risk, or hunker down in protect mode, but stay flexible. With a government like ours it’s all we could ever do, can do, or will be able to do.
Constantly improving communication technologies have telescoped the amount of time necessary to create a new conventional wisdom. Hence, the renowned gurus who ignored obvious real estate and stock market bubbles now inform us that the recession is ending. Let the buyer beware!
I don’t think anyone seriously considers the economy as improving.
What we’re witnessing is the glossing over the carnage.
A couple of years ago when unemployment was at 5%, the media would put a negative spin on that somehow and basically attempt to put as bad of a light on the economy as possible.
Now we’re seeing the opposite.
I wish I could predict things.
I knew you’d say that.
It doesn’t matter if the economy is better or not, politically the Democrats need to push the message that the economy is better, even if millions of people are still out of work. We can predict politics much better than economics, and politically the Dems know they are dead if the economy isn’t perceived to be better, regardless if it really is.
Obama is making the same mistakes as FDR…..Things will get worse.
It is indeed a reflection of the fact there really are no experts in economics. You are right that there are a host of difficulties to be faced, such as additional housing and commercial markets, devaluation of the dollar, inflation, and the fact the US has not really changed in its manufacturing capability. Added to that, current monetary policies of the Obama administration and the Fed are a guarantee of future chaos. Perhaps we will have a blip of prosperity, but the long-term appears dismal. The answer-how about self-reliant farming?
I am worried the government wasted so much money to weaken the future value of the dollar and still thinks we are past the recession.
To me this is echo economy.
They threw in billions and kept interest low so a lot of people have remortgaged and re established loans but no one I know of thinks that we are past or even near the end of this. the looming debt is a devaluation that needs to be adjusted to in the coming years and monetary worth will take a blow that we will need to adjust to.
Business and consumer buying power will be changed and a president that thinks his awesomeness is the required salvation of our every flaw is a joke.
We need law changes, spending habit changes and a government that isn’t aggressively dismantling capitalism in favor of the stale corrupt government induced budget slop of socialism. The constant threat of more government waste and budget shortfalls created by bad legislation to buy a voting block is corrupting our future potential and not resolving the issues that were government induced in the first place that got us to this stage.
Smoke and mirrors used to sustain government power over financial opportunity and growth, promoted like a religious cleansing from capitalism faults, is not a cure of bad laws, bad theory and bad government strangulation and manipulation of markets.
We will be wading through this debt recovery for decades only to be slowed by an uncompetitive business model of socialism and its favored political methodology of forcing unaffordable social mandates an unsuspecting and naive public that the rest of the world is growing away from.
The recession and its economic adjustment to the world growing markets and our declining monetary value has yet to be realized because Obama has create another financially manipulated bubble that’s debt has yet to be realized against market worth.
Like investments, one must see if the loan is worth the investment and can it be paid back, after which you will know if productivity gained a value or lost it…I’m betting we have lost too much and will lose more with the full sweep of socialism’s crushing economic strangulation of our markets. That is something the Dems and Obama can take credit for.
Optimism is out until the debt damage is assessed against human worth and how we are left standing when the full weight of the fraudulent economy is realized. Until then the recession is in full swing, because the devaluation is in full swing.