Beat The Press

As a proud wonk, I'm the sort of guy with a lineup of favorite economists. And foremost in that droning dream team would have to be CEPR's Dean Baker. So imagine my excitement that he's now writing a blog for Tapped! And, in true Bakerian fashion -- my understanding is that he sold his house and moved into an apartment to await the pop of the real estate bubble -- he's predicting a housing crash:

We have enough data at this point (lower sales, rising inventories, falling median prices) that I feel confident in saying that the crash has begun. We don't yet know the speed of the decline or the full repercussions in terms of the financial havoc or the extent of the economic downturn.

Of course, the housing crash, like the stock crash, was entirely predictable. Housing prices had never risen like this in the past and NO ONE has identified anything that made the period after 1996 different from the period prior to 1996. The press can be given a bit of a pass on this one -- as with the stock bubble, most of the blame lies with my profession. In both cases, economists were more worried about the possibility that we might have to raise Social Security taxes in 50 years or tariffs on imported shirts, than trillions of dollars of paper wealth disappearing with the collapse of a financial bubble. [...]

the crash of the housing bubble will not be pretty. Millions of people stand to lose their home and/or their life savings. However, it was inevitable. The bubble created a fantasy world that could not continue. At the peak of the bubble, 160,000 people a week were buying a home, most at bubble inflated prices. The longer the bubble persists, the larger the group of people who paid way too much for their home. While it is not good that so many dreams had to be ruined, the number will be even larger if the bubble deflates slowly. So I make no apologies about hoping for the hasty demise of the housing bubble.

As you can tell, it's uplifting stuff. Important, though. What Baker doesn't mention is that many of those mortgages were variable rate mortgages, which raises the possibility of a vicious cycle where the crash drives interest rates, making mortgages more expensive, furthering the recession, further hiking rates, and so forth. It's really worrisome stuff, and on the heels of news that second mortgages have been used as little more than ready cash flows for those wanting to spend more time at home, there's a real potential for calamity here. In any case, your best guide to the armageddon will be Baker, and you should check him out.