April 24, 2008

Bernanke's plan: Stopping massive deflation with massive inflation and hope it all comes out in the wash



Grocery prices are soaring. Gas prices are soaring. Hell, most prices are soaring. Thank you Helicopter Ben.

But about the only thing that ISN'T soaring is the price of homes. In the middle of this rampant (consumables) inflation and dollar destruction, you have historic (asset price) deflation. Just as most HP'ers have predicted.

Eventually though, home prices will stop falling. Probably quite some time from now, when the historic housing P/E ratio is restored, confidence is somewhat restored, pre-bubble prices are back, and it's cheaper to 'own' than rent.

And when that happens, and home prices stop falling or god forbid start going up, the NAR and the few realtors who are left will start saying "home prices stable!". But when you factor in the wild inflation underway (the real inflation, not the government-reported inflation), real home prices will still be in freefall, and the crash will have been much worse than people think, and the combination of flat incomes, job losses and rising consumable and service prices will be devastating.

Here's a new editorial on the inflation solution, which is well underway I believe. Meanwhile, got gold? Got food?


The Inflation Solution to the Housing Mess

The policy alternatives in the post-housing-bubble world are painfully unpleasant. In my view, the least bad option is for the Federal Reserve to print money to help stabilize housing prices and financial markets.

Yes, use reflation to soften the pain for Main Street and Wall Street. If instead we let housing prices fall another 25%-30% – as predicted by the Case-Shiller Home Price Index – it's almost certain that Washington will end up nationalizing the mortgage business.

While there is a substantial risk that inflation may rise for a time – this would be the policy goal – monetization is more easily reversible than nationalization of the mortgage market.

38 comments:

Anonymous said...

Gots my gold

William said...

There's something I don't quite understand with this whole inflation thing, and I'll admit I'm more of a novice than an expert.

With inflation raging, and prices for consumables not likely ever returning to what we consider normal, why is it that housing prices won't follow at some point?

What I mean is this: If prices for fuel, lumber, copper, steel, and everything else going into a house continue to rise and rise, won't the cost of building a home rise as well? Doesn't that in turn mean houses will cost more?

I agree that Bernanke is trying to stem off deflation, but part of that I think also means he's trying to bolster inflation to reduce the perceived "size" of the debt for homedebtors. In other words, by inflating prices, 200k of debt may not seem like much for a home in 5 years with an average of 5% inflation or mnore over a few year period.

Again, just a question posed by a novice. Feel free to flame as you wish.

tangelo mozilo said...

William,

It seems that you are correct in that commodities price inflation requires builders to sell houses at higher prices in order to remain profitable.

However, remember that builders also buy and sell the land that the houses are on. A deflation of land value will mean that builders can sell houses for cheaper because they paid less for the ground they put the houses on. This may cancel the effects of commodity inflation.

Also, remember that monetary and commodity inflation in the absence of wage inflation will not effectively reduce the price of housing. If people are paying more for gas and bread, but their wages remain stagnant, that means their home purchasing power is actually being ERODED by inflation. Only where there is wage inflation will the precieved size of mortgage debt be decreased.

DOPES said...

SCREW THIS DUDE'S OPINION!

PUT ALL THE LENDER'S, REAL ESTATE AGENTS, LIAR LOAN MAKERS, AND EVERYONE ELSE THAT CAUSED THIS MESS IN PRISON LABOR CAMPS AND SELL THE GOODS THEY MAKE AROUND THE WORLD CHEAPER THAN CHINA DOES TO PAYOFF THIS MESS!

DOPES!

Anonymous said...

My houses value went up over 4% last month! It did drop for a short period, but now is climbing again. Of course I live in CT where we still have a great economy and REAL wealth. I love New England!

Kalifornia, Arizona, Nevada, Michigan, Florida..... FAKE wealth. DOPES!

self-hating white kook said...


What I mean is this: If prices for fuel, lumber, copper, steel, and everything else going into a house continue to rise and rise, won't the cost of building a home rise as well? Doesn't that in turn mean houses will cost more?


Three problems with that simple logic:

1) If banks will not lend the money, people can't afford to buy the $800,000 houses

2) People would rather rent and eat than buy and starve

3) Houses were wildly overpriced during the boom years, and the raw materials prices did not correlate with the house prices

Stop the Madness said...

When you have a cancer, you cut it out and Kill It so it does no further harm.

Bush/Cheney/Bernanke/Paulson are cancers and the enemy of the american people.

When will they be stopped?

Anonymous said...

Why is it that these economists don't yet understand... THE US IS BANKRUPT!!! (Along with most of the western economy)

It has to borrow 2 billion A DAY (on top of the other 4 billion it spends of tax payer money) just to keep the lights on.

2 billion people... say it with me now... TOOOOBIIIIILLION.

Thats 2,000,000,000 a day!

730,000,000,000 a year!

Count the zeros!

Zimbabwe is falling apart, starving and there are food riots because it is 4 billion in debt. This is equal to TWO DAYS of the American deficit.

If Americans decided to live within their means for a week and give that extra cash to Zimbabwe, that African country would be living on easy street for the next 100 years!

How long do they think this party is going to last?

Anonymous said...

The increases were mostly in the cost of the land which is coming down.....

Anonymous said...

"Mr. Makin is a visiting scholar at the American Enterprise Institute."

That says it all....

Feh.

William said...

tangelo and salf-hater-

thanks for the input. I think the land depreciation makes the most sense. Though the actual cost of the house will increase, the overall cost of buying still won't because of the decreasing cost of land.

I still think that inflation will help bolster home values to some extent.

Anonymous said...

If Americans decided to live within their means for a week and give that extra cash to Zimbabwe, that African country would be living on easy street for the next 100 years!

Pollyanna

Anonymous said...

But, but Mish sez we will have deflation! And all my money is in dollars under my bed! What to do? Buy gold. No wait its down today! Sell sell sell. No wait, it ticked back up, Buy buy buy. Arghhh I'm just to stupid to figure it out on my own!!

michael said...

CNBC was calling a bottom on the economy as a whole this morning.

but i think they call a bottome everyday.

michael said...

"The increases were mostly land"

with all the false demand created by the housing bubble the cost of building materials skyrocketed as well.

it takes alot of wood to make a house.

tangelo mozilo said...

anon 2:20 said . . .

"My houses value went up over 4% last month!"
-----------------------------
Based on what? A Zestimate? Oh, I forgot, its different in CT.

Learn how to use an apostrophe, and get a name.

Lady Di said...

It's coming. Ben wouldn't have it any other way.

Got gold?

BondsOfSteel said...

Inflation not only solves the housing problem, but also the Federal debt.

I've thought for years that the only way we'll pay off the debt is to inflate our way out of it. Pay off all those 1980 Regan era debts with 2010 dollars.

This will only work if we have wage inflation. So far, I've only seen evidence of commodity inflation...

Anonymous said...

You wage worms and time clock monkeys are going to suffer the most from inflation because boss-man ain't gonna give you no mo'. I run my own business and raised prices 30% in January. Inflation? I welcome it because it makes my debts less significant. Even with the higher prices, business has never been better!

Anonymous said...

Small Town Broker says,

William,

Take it from me, without an increase in wages / income home prices will fall.

Exotic lending enabled excessive leverage resulting in inflated prices.

We will return to prudent 30% housing debt to gross income ratios.

In the mean time you will be needing a down payment in order to buy.

Gonna take a while to move the exising inventory especially with all the foreclosures coming on and also now that lending guidelines are tightening and rates are rising.

Also, don't forget unemployment!

Gonna get lots worse before it gets better.

Anonymous said...

What seems like a reasonable outcome of the increased costs to build homes is that as raw materials costs rise, many of the home builders will not be able to turn a profit when trying to price homes at the price of already built homes. This in turn will cause many, many of the home builders to go out of business. This may actually cause a home shortage as the US population is sure to keep increasing. I'm not talking next year, but within 5 years. This home shortage will push home prices and rents up. The funny thing about that happening in that timeframe is that these people playing "Jingle Mail" will not be able to get a loan in most cases for 5 years, by which time home prices will have increased quite a bit from the bottom. So these people may be able to save some money by renting in the short term, but long term they will still be screwed by the housing bust, but also have a black mark on there credit rating. One thing about housing, it is one of the main things needed to support life along with food, water, and air. Sure there will be less money to go around due to higher costs, but people will always need housing. On the other hand people don't need iPODs, luxery cars, expensive vacations, ect. Just think about where you could really cut costs if our way of life goes down, shelter stays pretty close to the top of the list. We waste ALOT of money on stupid crap that we don't really need! Another nice thing about housing is that if the economy completely collapses (which it very well may!) at least you would own your home outright. Housing is a commodity, like it or not!

Refuse to buy overpriced said...

Please add John Makin to the "Hall of Shame" list. He has my vote.

mairca izda debol said...

Why is it that these economists don't yet understand... THE US IS BANKRUPT!!!

Tell that to the people demanding free healthcare and free college tuition for everyone, including the 30 million illegal aliens. Tell that to the people demanding that America feed, cloth and house the world's poor.

Anonymous said...

-- I still think that inflation will help bolster home values to some extent.

William,

Just my two cents on this issue ...

I think you are confusing the home "value" with the home "price". Home price may hold up better in case of inflation, but not the value. That is what exactly is going to happen. While the Fed can inflate up the price of a house, but the value of the house could be going down because of inflation.

If the house price increases 5%, but everything else 10% more expensive, the owner of that property is losing value.

Anonymous said...

With inflation raging, and prices for consumables not likely ever returning to what we consider normal

sorry, but this is the kind of attitude that causes bubbles in the first place.

1. commodity price increases have nothing to do with inflation, only the increase in money and credit.
2. inflation is never permanent, if prices get too high relative to other markets, more jobs/products will get outsourced/imported.
3. inflation is the result of congress spending more then it takes in (national deficit/borrowing), "Eventually" that will need to be paid back or defaulted on, then all that borrowed money will magically disappear, although this can still be many generations away.
4. in an inflationary invironment, people are expecting raises, spending like there is no tommorow, (why hold cash when it will be worth so much less next year). from what i see the opposite is happening. people/banks are hoarding cash, those that can anyway, and few if any are expecting big raises, most feel fortunate to still be employed

William said...

Anon at April 24, 2008 6:32 PM

If the house price increases 5%, but everything else 10% more expensive, the owner of that property is losing value

I guess that's more to my question. Though a house may lose value, if you sell for 5% more than you bought, you still walk away with positive cashflow.

Anonymous said...

If inflation is 10% and houses go up 5% your still ahead of inflation in terms of an investment due to leveraging. For instance, lets say you buy a $250,000 house with 20% down ($50,000) and the house goes up in value %5 did you only make $2,500, which would be %5 of your investment? No, you made %5 of $250,000, which comes out to $12,500, or a 25% return. Sure there is maintanence on a home, but if you buy a new home the maintenace cost are very low for the first several years. Just think about it.

very concerned said...

Food rationing in the US begins ...

http://www.guardian.co.uk/world/2008/apr/23/usa2?gusrc=rss&feed=worldnews

frede said...

It occurred to me just the other day that the neocons' plan to resolve the (ballooning) national deficit would be to run the presses at top speed until the dollar is cheaper than rainwater, then use this cheap-ass dollar to pay off its debts.

Anonymous said...

You wage worms and time clock monkeys are going to suffer the most from inflation because boss-man ain't gonna give you no mo'. I run my own business and raised prices 30% in January.

Yeah, and who's gonna buy what you're selling when wages stagnate but prices increase 30%?

With a middle class in decline, your business is fucked too, because nobody's going to be able to buy your products.

Oh, and it doesn't matter if you're B2B either, because your clients' revenues are ultimately dependent on consumer demand -- which will collapse if wages stagnate or decline while prices soar.

Anonymous said...

This feels like DELFATION out here in the Inland Empire!!!

Job losses, housing erosion, business closures, credit lines taken away, tighter lending standards, abissmal home and auto sales, and also higher commodity prices.

There feels like a pressure to have cash out here. People are not spending like usual and it is the talk of the town so to speak.

There is no wage inflation at all.
The massive oversupply of homes we are about to encounter in the next 18 months will obliterate any chances of housing stabalization.

Don't believe the stock porn!!!

ICEMAN

Anonymous said...

all you bitter renting tools are screaming about inflation and also renting.

about the stupidest combination possible.

Anonymous said...

NYT -- Foreclosure Hits Even Connecticut’s Wealthy

GREENWICH, Conn. — This wooded town of roughly 60,000 on Long Island Sound — home to dozens of hedge funds, many millionaires and more than a few billionaires — is one of the wealthiest enclaves in the country. But even Greenwich is not immune to the wave of home foreclosures sweeping the nation.

On Hettiefred Road, for example, the owner of a 2,720-square-foot, four-bedroom colonial featuring a luxury kitchen, swimming pool and tennis court, has been threatened with foreclosure for months. On Stanwich Road, another house worth $2.6 million is close to going on the block. Several dozen others have received foreclosure notices this year.

But there is a difference from most other communities. Auctioning off such homes is a far greater challenge here than elsewhere, as affluent but cash-squeezed owners often find ways to delay losing their home, sometimes by coming up with just enough to make last-minute payments, avoiding a final sale — for a while, anyway.

Just ask John Thygerson, who parked his Jeep sport utility vehicle in front of the empty house on Hettiefred Road on the flawless spring day last Saturday. As a foreclosure auctioneer, he was scheduled — for the third time since January — to sell the house. But the owner, a construction business owner who has fallen on hard times, made a last-minute mortgage payment and the foreclosure was postponed yet again.


http://tinyurl.com/3kcdlb

Anonymous said...

keith, has the price of beer or fish and chips or dental work, gone up yet in jolly old england?

Anonymous said...

Who in the name of God is going to pay for this?

The thing that the nuts in charge don't understand is that most people don't make choices about commodity consumption based on investment potential. They buy food because they are hungry.

Anonymous said...

as if there are only 2 options. why not let the free market run its course?

I heard a stupid D-list foreign celeb talking about how the US needs to put more money into educating foreigners. I'm so sick of foreign celebrities coming here to tell our government how to spend our tax dollars. liberals are so annoying they way they go on and on about how we need to throw money here and there without even pointing out that they are taking it from US citizens.

Anonymous said...

Got lots of DGP.

Double Gold!!!

LauraVella said...

Anon said:" No, you made %5 of $250,000, which comes out to $12,500, or a 25% return."

-----------------------------------
I have to disagree. How can the equity be counted as money earned?

Its not 'real money' unless you sell the home and have cash in your pocket.

Kinda like saying you own the condo, when in reality all you own is the "airspace" inside the building. Same thing goes for stock prices/increases-its not real until you cash out.

All taxes, maintance and insurance costs have to be taken into consideration because it's REAL money paid toward a depreciating asset.