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Why Does the NYT Want the Government to Make Housing Unaffordable? Print
Wednesday, 25 May 2011 04:12

The lead NYT editorial tells readers that it is surprised and upset by the deflating of the housing bubble. It tells us:

"At times, it has looked as if things were improving, like last year’s jump in sales because of a temporary homebuyer’s tax credit or the recent rise in new-home sales from near-record lows. But, over all, sales and construction have been flat for two years, while prices, driven down by foreclosures, are plumbing new depths."

Actually no; it never looked like "things were improving" to people who follow the housing market. It looked like the tax credits were temporarily delaying the deflation of the housing bubble. This delay allowed banks and investors to have hundreds of billions of dollars in mortgages, which would be underwater today, taken off their books and replaced by Fannie and Freddie guaranteed loans, through sales or refinancing. 

Prices are still close to 10 percent above their trend level, based on either the 100-year long-term trend in house prices or the current price to rent ratio. Neither the NYT, nor anyone else, has provided an explanation as to why we should expect prices to settle above trend.

It is not clear why the NYT would view any delay in the bubble's deflation as a positive development. People who buy houses at prices that are still inflated by the bubble can anticipate losing money on their house. Does the NYT have some reason for thinking it is good policy to get new homeowners into homes where they can anticipate capital losses.

More generally, high house prices amount to a transfer of societal wealth from people who don't own homes to those who do. Since the latter group is much wealthier on average than the former group, why should it be public policy to promote this sort of upward redistribution of wealth? 

The NYT's failure to seriously think about the housing market demonstrates an extraordinary laziness that prevents them from clearly understanding the policy implications. The economy will have adjust to a situation where prices return to trend levels. This will mean lower consumption. (Isn't this what everyone wants -- higher savings?) The lost consumption must be replaced in the short-term by government spending, in the longer term by more net exports. The latter will require a lower dollar. This is all accounting identities from Econ 101.

As far as the housing market, a little clearer thought would get policy to distinguish between markets where the bubble is still deflating (e.g. Seattle, Los Angeles, Boston) and markets where prices are likely overshooting on the low side (e.g. Los Vegas and Phoenix). It might make sense to have policies to boost prices in the latter set of cities. It makes no sense to have policies to boost prices in the former.

Finally, the simplest and cheapest way to help homeowners facing the loss of their home is to give them the right to stay in their house as renters paying the market rent. This requires no taxpayer dollars and no new bureaucracy and would immediately help all the homeowners affected. For these reasons, it is a non-starter in Washington.

Shocking News: Not Everyone Who Got Stimulus Money Paid Their Taxes! Print
Tuesday, 24 May 2011 04:36

The Washington Post called readers attention to this shocking item today in an article on a new report from the Government Accountability Office that found stimulus recipients owe $750 million in taxes on $24 billion in stimulus payments. Of course people cheat on their taxes on non-stimulus income also.

It would have been helpful to compare the rate of cheating on stimulus with non-stimulus income to determine if compliance was especially bad with stimulus income. The Internal Revenue Service reported that $345 billion in taxes went uncollected in 2006, more than 4 percent of total income in that year. This suggest that the rate of tax evasion with stimulus funds (@ 3.1 percent) might be somewhat lower than with income more generally. The Post should have included this comparison.

Harvard's Joint Center on Housing Still Doesn't Understand the Housing Market Print
Tuesday, 24 May 2011 05:34

Harvard's Joint Center on Housing, which became famous for its failure to recognize the housing bubble, apparently still has no understanding of the housing market. An article by the Associated Press that refers to analysis done by the Center fundamentally misrepresents trends in the housing market.

It tells readers that:

"From the 1940s until 2007, homes appreciated an average of nearly 5 percent a year, adjusted for inflation. In the past four years, the median price of a single-family home has sunk 37 percent, by $57,500, to its lowest since 2002."

Actually from the 1953 to 1996 house prices just rose in step with the overall rate of inflation according to the Bureau of Labor Statistics home price component (eliminated in 1981) and Federal Housing Financing Authority's House Price Index. The entire increase in real prices occurred during the bubble years from 1997 to 2007. This means that prior to 1996, homeowners had no reason to expect price appreciation in excess of inflation.

The article also tells readers that:

"Before the housing bust, mortgage rates were so low it was often cheaper to buy than rent. That was true a decade ago in more than half the 54 biggest metro areas, according to Moody's Analytics. Today, by contrast, it's cheaper to rent in about 72 percent of metro areas."

This is complete nonsense. House prices have plummeted since the bust and interest rates are lower today than at any point prior to the collapse of the bubble. There is no consistent methodology that would show that the cost of renting has fallen relative to the cost of ownership.

The article also asserts that:

"the median price of advertised rents rose 4.1 percent between the end of 2009 and the end of 2010."

This is misleading because this figure does not control for the quality of the units on the market. The Bureau of Labor Statistics rental index, which does control for quality, rose at just over a 2 percent rate during this period.

[Addendum: A reader has called to my attention the fact that the comments cited in this post may be from AP alone and do not refer to the joint analysis with the Harvard Center that is cited at the beginning of the article.]

Isn't a Government That Bans Importing Drugs from Canada Bigger Than a Government That Allows Imports? Print
Tuesday, 24 May 2011 04:02
Not according to Dana Milbank it isn't. Milbank points out ways in which former Minnesota Governor Tim Pawlenty has deviated from the Republican orthodoxy. While Milbank puts these deviations as being support for big government, there is no obvious relationship between these deviations and views on the size of government. Allowing people to buy lower cost drugs from Canada may not be good for the drug industry, but it actually implies a smaller role for the government.
It's Monday and Robert Samuelson Has Something Silly to Say in the Post Print
Monday, 23 May 2011 05:09

Today the good news is that the economy is growing. Let's get out the champagne!

Of course the economy almost always grows. The question that serious people ask is how fast is the economy growing. The answer is that over the last year the economy has grown by 2.4 percent. This is a hair shy of the 2.5 percent growth rate that the economy needs just to keep even with the growth of the labor force. The drop in the unemployment rate that we have seen from its 10.2 percent high point has been entirely due to people dropping out of the labor force, the employment to population ratio has not risen at all since November of 2009.

It is also worth noting Samuelson's choice of experts to promote the good news line about the economy. In reference to the housing market he quotes Ben Herzon of Macroeconomic Advisers saying, “There’s a boom out there somewhere, ...  it’s just a matter of when.” It's worth noting that Macroeconomic Advisers was completely dismissive of the idea that there was a housing bubble prior to its collapse beginning in 2006.

The article also cites Mark Zandi's statement that he is optimistic about the economy's prospects for 2012. It is worth noting that the downturn caught Zandi completely by surprise. He has also been consistently overly optimistic about the strength of the recovery.

Homeownership Also Discourages Workers from Moving to Get Jobs Print
Monday, 23 May 2011 04:58

The Washington Post reports that Portugal is changing its rent control laws at the insistence of the European Union and the IMF because they impede the movement of workers looking for new jobs. While there can be cases in which workers will be reluctant to give up a rent-controlled unit in order to get a job in another city where they will have to pay higher rent, homeownership also can pose the same obstacle to moving.

If there is a price to rent (annual) ratio of 15 to 1, and sale costs average 6-7 percent of the house price, then a worker moving to a new city can basically expect to give up a year's worth of rent to cover the cost of the move.

This article also includes the assertion that employment protection legislation, that prevents employers from firing workers at will, impedes growth. Actually, there has been considerable research on this topic and most of it suggests that these measures have little impact on employment and growth.

The Housing Bubble Is Deflating! Big News in the NYT Print
Monday, 23 May 2011 04:23

The NYT noticed that banks have lots of foreclosed properties and that this is depressing house prices. It warns readers that house prices could fall by 5 percent by the end of 2011.

This piece is bizarrely uninformed about the housing market. First, the decline in house prices is not new. Prices have been falling at the rate of at least 1.0 percent a month since the first time buyers tax credit ended last fall. With prices having already dropped by 2 percent through February, we would have to see a sharp slowing in the rate of price decline for the year-end drop to be just 5 percent.

More importantly, this decline is actually entirely consistent with house prices moving back toward their long-term trend in which they have just tracked the overall rate of inflation. If house prices drop by 12 percent over the course of 2011 they will be just back on this trend.

It would have been useful to readers if this article contained the insights of someone who was more familiar with trends in the housing market.

USA Today Is Very Upset That the United States Doesn't Have Double Digit Unemployment Print
Sunday, 22 May 2011 21:56

Most people would consider double-digit unemployment a bad thing, but most people don't run USA Today. In an article on President Obama's trip to Europe, USA Today talks about the economic disaster that has befallen Ireland as a result of its budget cutting and tells readers:

"Financial experts and credit-ratings agencies say the mess is a warning for Obama and Washington lawmakers: Get your fiscal house in order or risk the same fate."

Of course getting its fiscal house in order is what led to the double-digit unemployment in Ireland. Ireland actually had low debt and deficits prior to the collapse of its housing bubble.

By the way, the "credit-ratings agencies" referred to in this piece are best known as the people who rated hundreds of billions of dollars of subprime mortgage-backed securities as investment grade. The "financial experts" were people who could not see the largest asset bubble in the history of the world.

There is no evidence that USA Today spoke with anyone for this article who recognized the dangers facing the world economy before its collapse in 2008. Readers should keep that in mind in assessing the argument it presents.

The Washington Post Never Heard of the European Central Bank Print
Sunday, 22 May 2011 08:21

That's what readers of its front page piece on austerity in Spain must conclude. The piece asserts that Spain's government has no choice but to make major cutbacks to the generosity of its welfare state.

This may be true given its situation as member of the euro zone. However, this is an outcome that is being imposed as a result of policy decisions by the European Central Bank (ECB). The ECB, which failed to notice the huge housing bubble in Spain and elsewhere, is deliberately imposing a relatively contractionary policy on the euro zone countries. This is leading to higher unemployment in Spain and other euro zone countries.

The higher unemployment and slower growth resulting from the ECB policy puts more fiscal stress on the Spanish government. The restrictive policies of the ECB are the proximate cause of Spain's fiscal difficulties. The ECB's role in contributing to Spain's financial hardship should have been mentioned in the piece.

Why No Mention of Six-Figure Pensions at Age 50 at the IMF? Print
Sunday, 22 May 2011 07:49

The Washington Post Outlook section has a column by former World Bank director Moises Naim calling for change at the IMF in the wake of Dominique Strauss-Kahn's resignation as a result of sexual assault charges. It is striking that the piece makes no mention of the bloated pensions received by IMF staff.

The IMF's pension structure allows many of its economists to be able to draw pensions in excess of $100,000 a year in their early fifties. It is remarkable that no major news outlet has ever mentioned these exorbitant pensions at a time when politicians across the country have been screaming about pensions for public employees that average less than $30,000 a year and generally require workers to wait until their 60s before they start receiving benefits.

The high pensions at the IMF might be seen as especially offensive since the institution has been pushing countries around the world to raise the retirement age for their Social Security systems and public sector employees. The IMF also has little basis for claiming that worsening benefits will prevent it from attracting good employees. Its current staff completely missed the housing bubbles in the United States and elsewhere, the largest asset bubbles in the history of the world, leading to enormous suffering for hundreds of millions of people. It would be difficult to imagine being able to assemble a less competent group of economists than the current crew.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.