Back in 2007 I remember sitting in a conference room in the office
of a CPA firm in San Francisco participating in a conversation about the
housing market. I don't remember the details of the conversation, but I
do remember that I exclaimed that it was going to take many years before the
housing market recovered. My colleagues disagreed with me. They
said that I was wrong. They probably don't remember the conversation, but
I wouldn't get much pleasure from rubbing their noses in it anyway. We
are still in a long slog.
But even then I didn't understand the severity of the problem. I didn't think the overall value of the real estate market would decrease so much. Back in the early 90s the real estate market had stalled, but housing prices didn't collapse. The theory is that homeowners aren't likely to sell their homes at a loss; they'll instead just wait it out thereby preventing overall housing prices from dropping. In the case in the last 00s, many of those homes had adjustable rate mortgages. The rates increased thereby making the monthly payment increase, and the homeowner couldn't refinance because the value of the property fell to less than the loan. Not being able to make the payments caused the banks to foreclose. To get rid of the properties they sold many at big losses thereby depressing the market even more.
But someone agreed with me. Back in January 2008 The Economist magazine published a column called "America's Economy: The Long Slog". And four years after my prediction of a long slog, we're still in a long slog, according to Dr Charles Plosser, president of the Federal Reserve Bank of Philadelphia. In a radio interview with BBC economics editor Stephanie Flanders, Dr. Plosser said that the U.S. economy is headed for a "long, slow slog".
The same factors that caused the Great Recession are still in effect. Millions of homes are in some stage of foreclosure. Tens of millions are behind on their mortgage payments, and even more are underwater.
For decades the engine of the nation's and truth be told the world's economy has been the American consumer. For decades Americans have been spending more than their incomes. Savings rates have been at historical lows. People were taking out home equity loans to spend on consumer goods and entertainment. But the party ended when home prices dropped thereby eroding the wealth of Americans. We hear a lot about the national debt, the amount the Federal government owes to bond holders. But debt held by private Americans surpasses the Federal government's debt. Consumers aren't going to be fueling the economy for years to come.
It's going to take years before all the homes that need to be foreclosed are sold. Housing prices won't increase until that happens. Then after that it will take years for consumer to recover. It may take as long as 2015 before the economy regains its footing. And neither a tax cut nor a stimulus isn't going to resolve this process no matter how strategically designed.
