Hootie & the Blowfish had it backwards aka "The Solution to America's Economic Problems"
The immortal Hootie & the Blowfish had it backward in their classic track "Time" when they said:
Time, why you punish me?
You wash away my dreams.
Like a wave bashing into the shore.
Time, why you walk away?
Like a friend with somewhere to go
You left me crying
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. Take a look at the following charts to get an idea of how far out of whack the housing market had gotten and how far home values still need to fall before they can be considered reasonable:
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.
As someone who owns a home. it pains me to say this because I don't want to see the value of my most expensive asset continue to fall, but I don't see any other possible solution to our country's current economic difficulties. If only I had known five years ago what I know today. Oh well, live and learn. I like my home, I can afford my home, I am not underwater, and I wouldn't trade raising my two sons in a nice, stable home environment for anything in the world.
I asked myself this morning whether I was getting too bearish from seeing all of the bad news out there. One always runs the risk of being overexposed to good news and becoming a perma-bull on the way up or vice versa and becoming a perma-bear on the way down.
So I took a step back and asked myself what the root cause of the current crisis is. I came up with two answers...housing and leverage.
Then I asked myself what it is going to take to fix the problems with these things. In order for housing to become more affordable, people are going to have to
A) Earn more money, which is pretty darn unlikely in the current environment.
B) Interest rates are going to have to fall, but they're already so low that they can't fall much further.
C) Home prices are going to have to fall, this is the only likely solution.
When home prices do fall to a reasonable level, people will again be able to spend. Until then, with the value of their biggest asset falling consumer confidence will remain low, people will continue to save rather than spend, and the U.S. economy, which had become too dependent upon consumer spending, will continue to struggle. I remain convinced that the stock market will continue to struggle throughout 2009 before it finally hits bottom some time in 2010 and sits there in an "L" shape for a while.
After all of this depressing stuff, I do have a piece of positive news. Housing starts have fallen off of a cliff. Why is this good news you ask? Because the sooner those darn builders stop making new homes, the sooner we will be able to work off the excess inventory that is out there.