Accuracy in Media

Ask any two or three analysts what houses are really worth, and you’ll get at least that many answers.

“U.S. home prices fell 0.3 percent” from July to August, according to a Federal Housing Finance Agency October 22 News Release, which states that “For the 12 months ending in August, U.S. prices fell 3.6 percent.”

Also on October 22nd, the American Enterprise Institute (AEI) held part six of a six-month conference on “The Deflating Bubble,” with this section’s panelists attempting to maintain a positive tone in discussing “The Lessons of the Bubble and Crisis.”

Desmond Lachman, a Fellow who specializes in global macroeconomics at AEI, claimed that “housing and the economy are joined at the hip” since homes are a vital component of an individual’s wealth.

Thomas Zimmerman, a managing director at UBS Investment Bank, attempted to put a positive spin on the housing market crisis. He pointed out some positive signs in the real estate sector, such as the fact that home price indices have turned positive, affordability (which is comprised of home prices, interest rates, and income) is at an historic high, and existing-home sales have gone up.

Lachman’s slide show presentation, however, stated that “home prices will fall ten percent more,” explaining that housing vacancies and the foreclosure crisis will likely have a negative affect on home prices.

Zimmerman added a caveat to the fact that existing-home sales (economically more vital than new home sales) are on the rise, pointing to California as an indicator of a likely U.S. trend. In California in 2008, existing home sales bounced back quickly-“you do stimulate sales when you crash a market completely”-but those sales have recently abated. He warned that the rest of the country’s housing markets, where rising home sales mimicked California, will likely also soon mimic the state’s downward trend.

Some further problems Zimmerman foresaw included the reality of sharp, seasonal patterns in markets, which will likely cause a decline in home prices and affordability.

Also, there is a current build-up of delinquent loans which do not get pushed into the system. According to Mortgage News Daily on October 5th, “The number of aging delinquencies increased in part because fewer loans transitioned to foreclosure as usually happens around the 90 day delinquency point.” Eventually, warned Zimmerman, these delinquent loans will have to be acknowledged.

Commercial banks were hit hard when the housing market bubble deflated as well, claimed Alex Pollock. Bank loans and securities portfolios were largely affected by the real estate risks taken even “in the intensely regulated commercial banks,” he explained. His point was that “if you think that regulation will save you, it will not.” Zimmerman, in slight contrast, claimed that increased regulation is necessary, but still acknowledged that even with regulation the U.S. is “still going to have bubbles.”

In light of the reality of housing bubbles, Zimmerman suggested that the U.S. have three to four major agencies in the mortgage market (rather than the two mortgage giants, Fannie Mae and Freddie Mac). What we do not need, he said, is a Consumer Financial Protection Agency, since subprime lending basically stopped two years ago and banks are now being more cautious in their lending. An October 1st Wall Street Journal blog by Nick Timiraos affirmed that “the subprime market collapsed and private lenders tightened their standards significantly.”

Like Zimmerman, R. Christopher Whalen, expressed a concern that a “terrible period of loss is being disguised.” Whalen, co-founder and managing director of Institutional Risk Analytics, said that the U.S. government is more worried about international concerns and perceptions than in their own domestic economy. The cost to the U.S., he claimed, is inflation, adding that “if we continue on this path… most families will not make it in 20 years.”

John H. Makin, visiting scholar at AEI who specializes in international finance and financial markets, agreed with the other panelists that a disruption in the financial sector “can have a devastating effect on the real economy.” In fall of 2008, the U.S. “had a near-death experience,” he acknowledged, but he then hearteningly urged Americans to at least “remember that we got through that.”


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