by Calculated Risk on 5/23/2005 12:51:00 AM

My most recent post is up on Angry Bear: Housing Update.

UPDATE: Mark Szlazak sent me a link (audio) to an interesting housing debate. Fast forward about 10 minutes. Very interesting comments.



UPDATE2: Click on graph for larger image.

Courtesy of WSJ.

The WSJ has a front page article on housing. See The Big Picture for excerpts.






Also, see Dr. Duy's Fed Watch: The FED and the Housing Bubble.

In a recent speech in Bangkok, Dr. Paul Krugman expressed concern about the housing market and the US economy:

Prof Krugman cautioned that the adjustment to the present global financial imbalance could be a "messy" and "deeply troubled" one.

"The US current deficit, at close to 6% of gross domestic product, would be in a danger zone by any standard of a crisis. Most developing countries have no alarms ringing, but the US looks serious."

The US housing market, he said, was also showing signs of a bubble, marked by high prices and speculative demand.

"Macro indicators suggest that the market is speculative mania. Day trading cannot be sustainable. There is a real bubble mentality in the US housing market," Prof Krugman said, adding that prices of US housing were 250% of their real values.

A fall in the housing market and investment would spur a US recession and lead to capital outflows. "There would be a difficult contraction in the US economy. It
would be a very difficult contraction for monetary policy to deal with. I think there is 50% chance for a major break in the situation in the US next year."

Further, in Krugman's Op-Ed today expressed even more concern:

"So where will change come from?

Everyone loves historical analogies. Here's my thought: maybe 2004 was 1928. During the 1920's, the national government followed doctrinaire conservative policies, but reformist policies that presaged the New Deal were already bubbling up in the states, especially in New York.

In 1928 Al Smith, the governor of New York, was defeated in an ugly presidential campaign in which Protestant preachers warned their flocks that a vote for the Catholic Smith was a vote for the devil. But four years later F.D.R. took office, and the New Deal began.

Of course, the coming of the New Deal was hastened by a severe national depression. Strange to say, we may be working on that, too."

Although Dr. Krugman is not predicting a depression, I hope he isn't as prescient as FDR in this 1924 letter.

"I remarked to a number of friends that I did not think the nation would elect a Democrat again until the Republicans had led us into a serious period of depression and unemployment",

FDR, Dec 9, 1924