Alan Abelson and I agree that home prices have another 10% to 20% to fall and the economy will not stabilize until they do
Alan Abelson's column in this week's Barron's was amazing. Why? Because he said almost the exact same thing that I said in my post from several days ago titled "Hootie & the Blowfish had it backwards aka "The Solution to America's Economic Problems." In my post, I stated:
The only solution to the current economic mess that we find ourselves in is in fact time. It is going to take time for home prices to fall to an affordable level and the economy will not begin to recover until they do...
Things are not going to get better until home prices reach a bottom. The values of the toxic assets on banks balance sheets are not going to stop falling and in turn the financial system will not stabilize until they do.
The government can do whatever it wants, including using the hard-earned tax dollars of current and future generations to prevent the foreclosures of homes that should have never been purchased by less responsible individuals who didn't understand what they were getting themselves into or just got greedy and bought more house than they could reasonably afford, but home prices are going to continue to fall regardless. Uncle Sam is just delaying the inevitable.
The fantastic charts that I attached above support this theory. Here's what Abelson said about them:
...will reducing the number of foreclosures, desirable as that may be, halt the erosion in prices. While fewer foreclosures are likely to slow the rate of decline, they won't reverse the downtrend or determine "where homes prices end up."
House prices, in our bloodshot view, have another 20% or so to fall before hitting bottom and, at the earliest, we're talking sometime next year. And, possibly more important, a meaningful brightening of the current, profoundly bleak jobs picture, isn't in the cards for certainly as long, if not longer.
I strongly believe that the U.S. GDP will continue to fall and unemployment continue to rise until home prices drop another 10% to 20% and hit bottom some time in 2010. Unemployment in America will likely top out at somewhere around 10%...using the understated official metric.
For me, ratios like
- Real Estate Value & Mortgage Debt as a Percentage of GDP
- Existing Home Prices vs. Median Income
- Ratio of Home Prices to Rents
wll be the most important indicators of how far we are from reaching a bottom in this economic crisis. The sooner we get to an affordable level in home prices, the sooner the economy can begin to recover. By slowing the rate of foreclosures, the government may prevent some of the overshooting that home prices might do to the down side if they fall too rapidly, but make no mistake about it the government cannot stop prices from reaching their natural bottom. The question is whether slowing down the inevitable is with the price of bailing out undeserving parties, undermining legal contracts, and amassing a tremendous that this and future generations will have to pay.