I am no economist. So I invite and hope for contributions to this thread from those better-versed than I in such matters.
Ben Bernanke is hinting that more interest rate cuts may be on the way. Is this wise? It seems to me that we are already headed into an inflationary cycle, sparked by rising fuel costs and the sinking value of the dollar on world markets.
Won’t lowering interest rates just further devalue the dollar and thus cause further inflation by raising the cost of imports? And, given the economic doldrums caused by the burst housing bubble, could we be entering a period of stagflation? (Stagflation being the double whammy of a stagnant economy and high inflation, which the US experienced in the 70s under Nixon, Ford and Carter.)
Isn’t the remedy for stagflation higher interest rates-- the bitter medicine that cost Jimmy Carter his presidency? (SeeVolker, Paul.) Is Bernanke’s rate-cutting inviting prolonged economic misery? Why is he doing it? Is he trying to prop up the stock market? And if so, should that really be his top priority?
Is he playing politics? Trying to delay an economic crisis until it can be blamed on the next administration?
Not being an economist, I’m fumbling in the dark here. Maybe I have some things wrong. Help me out.
I’m not an economist either, but I doubt he is playing a political game here. I think he thinks he is staving off a real melt down of the system and this is the best short term way to do it. You have to remember that the Fed only has very limited tools at it’s disposal to effect things…and the biggest stick in their bag is being able to make adjustments to the interest rates (up or down). What I’m guessing he is trying to accomplish here is psychological…to instill a sense of optimism back into the market and get people to not go hide their heads (and capital) in a hole until things get better. THAT really WOULD have the effect of melting down the system.
If we can get over this hump things will recover. The dollar NEEDED to be adjusted. It now has been, and I expect it will recover somewhat. The housing market NEEDED to be adjusted as well…painful as that is to some folks…and now that also has happened. I expect that will also recover (some what) this year as well. There were multiple wammys in this latest down turn (there always are), but if things can be held together long enough we’ll have a soft(er) landing than we would have if the Fed hadn’t cut interest rates the way they have.
Maybe one of the financial dopers will be along to explain it better. I only grasp this all tenuously.
I keep hearing people say this (mostly realtors), but it just seems like wide-eyed optimism to me. I really don’t see anything on the horizon that would bring about a housing recovery.
Sub-prime mortgages aren’t coming back, and that’s what fueled the boom. Lending institutions are much more careful about assessing their risks now, and that will keep the pool of buyers constricted for the forseeable future.
At the same time, the inventory is being expanded by foreclosures, and by people trying to rid themselves of second homes they bought during the “easy credit” years.
Moreover, we are at the leading edge of the baby boomer retirement era. Many of these boomers are looking to downsize (and have been counting on home equity to help finance retirement), meaning they will be putting their big suburban homes onto an already bloated market. (Now you may say yes, but when they sell, they will buy other homes. Not necessarily. A lot of them already have second homes which they have been planning to use in retirement.)
I don’t see how the housing collapse won’t be a long-term problem.
People still need houses. Real Estate is still a good investment, if not as big as it was during the bubble.
I didn’t say anything about the boom coming back. I said the market would recover…and it will. It won’t be a boom again any time soon, but it’s not going to stay down forever. When the dot com bust happened people still used the internet, they still needed IT. Companies like Google still managed to make billions. It just wasn’t the wild free for all it was during the bubble.
Yep…there will be a lot of fire sales in the short term. That alone will allow for some recovery as people decide that there are some real bargains out there now. The people who stupidly stuck their necks out there (like I did during the dot com thingy) are going to feel the burn, no doubt…but that doesn’t mean the market won’t eventually recover. I was reading something the other day predicting somewhat of a recovery this spring as investors snatch up some of the properties at fire sale prices. Just like the over inflation of pricing during the bubble, the initial re-adjustment has devalued properties below their actual market value in a lot of cases…so, things will adjust again until a new equilibrium is found.
To have a recovery, you have to have people who can afford to buy. And with the restricted pool of buyers due to tightened credit standards, I don’t see how that can happen.
Lowering interest rates is supposed to stimulate the economy by encouraging extension of credit. (Or that’s how I understand it, anyway.) But it carries a risk of causing inflation. Read the first stagflation link in my OP.
There are lots of people out there that can afford to buy a new house (or even a second house). I just refinanced my house (at an unbelievable low rate)…and could probably buy a second house if I really wanted to. And I can’t be the only person in the country that can do so.
The restrictions are going to be on those who are either unqualified or marginal. There are going to be people out there who COULD afford a new house (or a high value new house) and aren’t going to get the loan in the current environment. But that doesn’t mean everyone is in that boat.
That isn’t what I said at all. What I said was that unqualified and marginal buyers will certainly not get loans now, though they would have until recently. This doesn’t mean that no one will get loans…or that no one will invest in Real Estate, which is what you implied in the post I was responding to.
Once again, I’m not saying Real Estate is poised to boom again…I’m saying that there WILL be a recovery this spring as people who DO have the means will pick up a lot of the properties from desperate people who stuck their necks out at fire sale prices.
And Real Estate is just one factor here…there are others. So, getting back to the OP I think it is smart for the Fed to make some short term adjustments to the interest rate in order to attempt to soften the landing (somewhat)…and it isn’t a political move to try and win for the Republicans (or whatever you are implying) in November. By November we SHOULD be well on the way to recovery, though I’m guessing the economy over the spring and summer will be pretty flat…and both sides will spin that to their best advantage.
Why would they do that? Let’s say I’m Joe Investor, and I see that there are 4 or 5 houses available at “fire sale” prices. Why would I buy them? I can’t live in all of them. They require maintenance, and payment of real estate taxes, so they represent a financial drain. I can’t expect to resell them at a profit because the pool of buyers is too small (due to tighter credit). Maybe I could rent them out, but in a bloated housing market, could I even get enough rent to cover my investment?
Moreover, conversion of housing to rental property tends to devalue neighboring property, which compounds the original problem, depression of housing prices.
Because investors realize two things you don’t seem to. One is that the recession won’t last forever. Two is that people will always need and want houses. You would buy a property at a fire sale price because you expect to make a profit on it at some point…and I can guarantee you that investors WILL be out there buying up those properties come spring with an eye toward making an eventual profit. And at some point when they do make that profit they will probably be called something along the lines of evil capitalists out to make a buck…or some such thing.
One has but to look at how the Japanese Real Estate market went after it’s (much more spectacular) melt down. Did people stop buying properties in Tokyo? I think not. A LOT of very rich folks took their lumps, and a lot of other folks bought those properties back up at fire sale prices…and their market eventually recovered and those properties made those folks who could invest in them a profit.
In the short term, yes. But do you REALLY expect Real Estate in, say, South Florida or Phoenix Arizona to stay depressed indefinitely?? Investors invest based on a projected eventual upturn in the market. If a house in, say, Phoenix was selling for $500k last year, while having a non-inflated worth of, say, $300k, but is being sold at the fire sale price of $200k, then an investor is going to look at the current devalued price and see an opportunity to make a profit (I use this example because this is just what my cousin is telling me HE is looking at…he lives in Phoenix).
The wealthy get to take financial advantage of poor economic circumstances to get wealthier. Thats the American way. Screw the people who lost their houses. I can get them at great discount. What a great country.
They wouldn’t lose their houses if they can afford what they bought. I bought a house over a year ago…I’m not going to lose it. I can afford what I bought. Why do you think that people who can’t afford the house they bought (or in a lot of cases bought additional houses with the expectation that they could simply flip them at a profit) SHOULD get to keep a house they can’t afford? Because they are ‘poor’?
As the article says, it’s mixed. While inflation is a very real concern, the falling value of the dollar actually has some benefits to the US economy because our products, goods and services become more attractive on the foreign market. This could reverse some of the out sourcing hand wringing going on with folks like gonzo, since potentially it may be foreign companies that outsource manufacturing to the US market here to the US directly (instead of paying import costs, taking a hit on the relative difference in currency, etc). US manufacturers will also potentially be looking to expand as US products will become more attractive.
As for Saudi and China having their hands around our throat…it goes both ways. Sure, they COULD use the nuclear option…but it would hurt THEM as much as US in the short term (and in the long term we’d pretty much never trade with them again…certainly neither country would enjoy most favored nation trade status with the US for the foreseeable future).
The US dollar HAD to be adjusted. It was being kept artificially high by countries like China who WANT a high US dollar vs their own currency so as to enjoy all the advantages to them of that situation. The dollar has pretty much bottomed out (unless someone DOES use the nuclear option) and will eventually reach a new equilibrium with the market wrt other foreign currency.
Were you planning to sell the house right now? No? Then what is the problem? Do you expect that 5 years from now (or whenever you go to sell it) that it will still be worth $50k less than you bought it for?
I often hear this said, but by this logic, we should be in great shape by the time our currency drops to the level of Mexico’s. Think of how much manufacturing we’ll have! We’ll be able to profitably make trinkets for export to Europe! (Of course, we would never be able to afford to visit there…)