A Decade of Declining Home Prices Ahead

The housing depression will last for a decade or more. This is by design. The Fed has been working with the banks to withhold inventory so prices do not fall too fast or too far. That way the banks can manage their write-downs without slipping into insolvency. But what’s good for the banks is bad for the country. Capital impairment at the banks, means no credit expansion in the near-term. It means the economy will continue to contract, unemployment will remain high, and deflation will push down wages and prices. Everyone will pay for the mortgage-backed securities scam that was engineered by the banks.

Typically, personal consumption expenditures (PCE) and real estate lead the way out of recession. But not this time. Both PCE and RE will stay depressed and act as a drag on employment and growth. Last week, in testimony before the congress, Fed chair Ben Bernanke made it clear that the Central Bank has no intention of providing extra monetary stimulus to make up for rapidly-dissipating fiscal stimulus or the winding down of government subsidies for auto, home, and appliance purchases. The economy must muddle through on its own. But without additional pump-priming, disinflation will turn to outright deflation and the economy will sink into negative territory. Bernanke knows this, but he’s absolved himself of any further responsibility. It’s just a matter of time before the next slump.

Look at housing. The facts are grim. This is from Charles Hugh Smith:

About two-thirds of U.S. households own a house (75 million); 51 million have a mortgage and 24 million own homes free and clear (no mortgage). Most of the other 36 million households are moderate/low income and have limited or no access to credit and limited or no assets.

If we look up all the gory details in the fed Flow of Funds, we find that household real estate fell from $23 trillion in 2006 to $16.5 trillion at the end of 2009. That is a decline of $6.5 trillion, more than half the total $11 trillion lost in the credit/housing bust. Home mortgages have fallen a negligible amount, from $10.48 trillion in 2007 to $10.26 trillion at the end of 2009. As of the end of 2009, total equity in household real estate was a paltry $6.24 trillion of which about $5.25 trillion was held in free-and-clear homes (32% of all household real estate, i.e. 32% of $16.5 trillion).

Full Story: A Decade of Declining Home Prices Ahead.