Home, Home I'm Deranged, Part 7

Ezra Klein talks to economist Dean Baker about the housing depression, and Baker reminds us in no way shape or form is our housing disaster over.

How’s the housing market doing right now?
It’s softening big-time. The first-time buyer’s credit was extended, and it did have a big impact in boosting the market. Housing prices rose from the second half of 2009 till the expiration, then the extension of the credit gave a modest boost up until April 30. Then the market just fell out. Most of our data takes six weeks or two months to come back, so we don’t know exactly what the new contracts look like. But sales have dropped through the floor, so my expectation is that prices are falling sharply. We should see declines through 2010 and possibly into 2011.

How would you rate the administration’s housing policy response?
It’s been painful. There’s been no clear thinking about what they were trying to do. There was talk about supporting the market. But what’s the logic in supporting a bubble? There were markets where the bubble has fully deflated and maybe has gone too far. Places like Phoenix and Las Vegas. It would’ve made sense to support those markets. But we didn’t do that. We were indiscriminate with our policies.

Our housing intervention always seemed very small in comparison to our stimulus and financial market interventions. Was that part of the problem?
The amount of money was small, which may have been good because it’s not clear that what you should’ve been trying to do was support house prices. Supporting house prices would’ve taken a lot of money. It would’ve been like agriculture subsidies, but cost more and made less sense.

How much is weakness in the housing market doing to slow the recovery? At this point, is the economy as intertwined with the housing sector as it was a few years ago, or have they been more effectively cleaved from one another?
They’re tied up. The basic story is that the loss of demand in the economy has come first from lost construction, which is largely housing. That’s been about 3 to 3.5 percentage points of GDP. Then we had a bubble in nonresidential real estate, which was another 1 to 1.5 percentage points of GDP. Then on top of that, we had the consumption driven by housing wealth. The administration talks about consumers being pessimistic, but it’s not consumer attitudes that are the problem. It’s their wealth. We’ve lost about $6 trillion in housing wealth, and I expect we will lose more.

Baker's actually more optimistic than I am.  I see housing declining into 2012. But look at that final number there:  $6 trillion in housing wealth got taken out of the economy.  Trillions more will follow. This really is a depression, we're not coming out of this without a fundamental reset, and the really scary part of this horror picture is still yet to come.

I think the next couple of years will be nasty.