The massive debt brought on by the crash is still slowly but surely being paid off. The number of homeowners who are delinquent or in foreclosure continues to drop, making housing investments less and less risky.
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| Data is for the New York Fed district and not the whole county, but the general trend is the same. |
Housing prices in real terms[1] and as a ratio to rental prices have dropped to pre-bubble levels.
The average amount of time a home sits on the market before being bought has returned to average levels as well (between 4 and 5 months). Eventually simple demographics will take hold. The population of the United States continues to grow, and the number of people per household remains above average. The consultancy Macroeconomic Advisers projects that the United States will need an average of 1.6 million new houses per year over the next decade; in 2012 1 million were built.
The Federal Reserve has been buying assets to create $40 billion of new money each month since September, and last month increased that amount to $85 billion. They have committed themselves to this level of money creation until unemployment is below 6.5%, so long as inflation remains stable. This will reduce the cost of borrowing and investing, and a bit of higher inflation would reduce the real value of debt over time and make exports more competitive. Generally speaking, it takes about six months for changes in Fed policy to have a real effect.
So 2013 should be better than 2012, however politicians can still ruin it.
The Fiscal Cliff has not been solved. While the most economically damaging tax cuts were avoided, the payroll tax holiday expired and will hit middle class spending. The spending cuts, which are the most damaging per dollar saved, were merely delayed for a few months. Between expiring stimulus provisions and the spending caps / automatic cuts agreed to in the 2011 Debt Ceiling deal, the economy is still scheduled to take a hit of around 2.1% of GDP in 2013, about the same amount the economy grew in 2012[2]. This will all be addressed during the debt ceiling fight, which last year Republicans used to threaten a default on debt payments to keep the government from spending what previous congresses and presidents had already approved to be spent.
Europe can still implode. Though the crisis is much tamer and the threat of the union dissolving is no longer ever present, who knows where it will be in a few months. In the meantime Europe continues to be dragged into a recession by its own policies.
Iran still claims to be pursuing uranium enrichment purities that will get them closer to a potential bomb. Though talks have resumed, and Iran’s economy is suffering under sanctions, the outcome is still uncertain and a bad one could cause a sharp (if temporary) rise in oil prices.
Last, the Fed is limited in what it can do. Its actions can’t cancel out the negative effects of scheduled spending cuts. There are legitimate arguments for Fed actions being ineffective given economic conditions (namely that consumers and businesses are still too saddled with debt to increase spending and investment regardless of how cheap the Fed makes it). And the Fed has indicated that it will only pursue money creation if they believe it is having a positive effect. At the same time, $45 billion a month of money is being created by buying long term securities, with the intention of pushing down interest rates on long term lending. This makes housing cheaper. Pushing down long term lending cost to stimulate the housing market is what the Fed did after the 2001 recession, which helped to get the housing bubble started to create this recession[3]. So, there is the risk that the Fed will be ineffective, withdraw stimulus too soon, or not withdraw it soon enough.
So here’s to 2013, it just might be better than last year.
1. Real terms meaning in terms of purchasing power, or money in terms of what it can buy rather than in terms of the numbers on it.
2. Yet the spending cuts won’t change our long run budget situation, so there negative effects would come at no benefit.
3. This doesn’t mean the Fed was responsible for the financial crisis, not even mostly responsible, only partly, the same partly responsible that everyone is. The Fed, or anyone else, didn’t force the average American to have a negative savings rate so yo could consume more and more. The Fed didn’t force investment banks to accumulate debt up to levels where they only had $1 in assets for every $40 in debt. It’s your fault America, increased savings elsewhere in the world may have made debt cheaper to hold but, excluding those who were just kids, you still did it to yourselves.
The Fiscal Cliff has not been solved. While the most economically damaging tax cuts were avoided, the payroll tax holiday expired and will hit middle class spending. The spending cuts, which are the most damaging per dollar saved, were merely delayed for a few months. Between expiring stimulus provisions and the spending caps / automatic cuts agreed to in the 2011 Debt Ceiling deal, the economy is still scheduled to take a hit of around 2.1% of GDP in 2013, about the same amount the economy grew in 2012[2]. This will all be addressed during the debt ceiling fight, which last year Republicans used to threaten a default on debt payments to keep the government from spending what previous congresses and presidents had already approved to be spent.
Europe can still implode. Though the crisis is much tamer and the threat of the union dissolving is no longer ever present, who knows where it will be in a few months. In the meantime Europe continues to be dragged into a recession by its own policies.
Iran still claims to be pursuing uranium enrichment purities that will get them closer to a potential bomb. Though talks have resumed, and Iran’s economy is suffering under sanctions, the outcome is still uncertain and a bad one could cause a sharp (if temporary) rise in oil prices.
Last, the Fed is limited in what it can do. Its actions can’t cancel out the negative effects of scheduled spending cuts. There are legitimate arguments for Fed actions being ineffective given economic conditions (namely that consumers and businesses are still too saddled with debt to increase spending and investment regardless of how cheap the Fed makes it). And the Fed has indicated that it will only pursue money creation if they believe it is having a positive effect. At the same time, $45 billion a month of money is being created by buying long term securities, with the intention of pushing down interest rates on long term lending. This makes housing cheaper. Pushing down long term lending cost to stimulate the housing market is what the Fed did after the 2001 recession, which helped to get the housing bubble started to create this recession[3]. So, there is the risk that the Fed will be ineffective, withdraw stimulus too soon, or not withdraw it soon enough.
So here’s to 2013, it just might be better than last year.
1. Real terms meaning in terms of purchasing power, or money in terms of what it can buy rather than in terms of the numbers on it.
2. Yet the spending cuts won’t change our long run budget situation, so there negative effects would come at no benefit.
3. This doesn’t mean the Fed was responsible for the financial crisis, not even mostly responsible, only partly, the same partly responsible that everyone is. The Fed, or anyone else, didn’t force the average American to have a negative savings rate so yo could consume more and more. The Fed didn’t force investment banks to accumulate debt up to levels where they only had $1 in assets for every $40 in debt. It’s your fault America, increased savings elsewhere in the world may have made debt cheaper to hold but, excluding those who were just kids, you still did it to yourselves.
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