The Fallacy of a Pain-Free Path to a Healthy Housing Market - Economic Letter, December 2010 - FRB Dallas
While we working stiffs were enjoying our families and taking a break from the world's cruel realities for the year end holidays, the Dallas Fed came out with a surprisingly refreshingly honest assessment of the housing market.
They in fact admitted that the attempts to stop the price declines in the housing market have failed miserably and that the market is going to continue to deteriorate going forward.
They even suggest that allowing it to crash and find its own level may ultimately be the least painful and correct thing to do.
Here are a few key excerpts form the article if you do not want to read it entirely.
“Without intervention, modest home price declines could be allowed to resume until inventories clear. An analysis found that home prices increased by about 5 percentage points as a result of the combined efforts to arrest price deterioration.[7] Absent incentive programs and as modifications reach a saturation point, these price increases will likely be reversed in the coming years. Prices, in fact, have begun to slide again in recent weeks. In short, pulling demand forward has not produced a sustainable stabilization in home prices, which cannot escape the pressure exerted by oversupply.”
“With nearly half of total bank assets backed by real estate, both homeowners on the cusp of negative equity and the banking system as a whole remain concerned amid the resumption of home price declines.[8] This unease highlights the housing market’s fragility and suggests there may be no pain-free path to the eventual righting of the market. No perfect solution to the housing crisis exists. The latest price declines will undoubtedly cause more economic dislocation. As the crisis enters its fifth year, uncertainty is as prevalent as ever and continues to hinder a more robust economic recovery. Given that time has not proven beneficial in rendering pricing clarity, allowing the market to clear may be the path of least distress.”
Those of you who were looking ahead to 2011 as the year we came out of the financial abyss and returned to the road of prosperity may want to reassess your expectations.
It appears more likely that 2011 will be the year when we finally begin to make the difficult choices we have postponed for the last 2 years.
As I have said before, the economy cannot recover until the real estate market returns to fair value, and the mortgage and credit markets write down the mountains of overhanging debt.
2011 may be the year when America begins to undergo its own implementation of austerity.
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