Zakaria: U.S. economy is recovering the fastest

Here's another must-read op-ed from Fareed's interns!

I'm not quite so optimistic as him, especially about housing when a quarter of U.S. homes are still underwater: that's just psychological ballast on consumption and investment.  Then again, Americans have short memories and may resume their free-spending ways again even if they cannot afford it, to every economist's delight.  

Now I know all my dear Republican friends will want to take issue with the following rosy analysis, but they should remember: no rooting against the home team!  Your psychic energy makes all the difference.  

America is recovering well

By Fareed Zakaria

October 25, 2012 | Washington Post

The International Monetary Fund’s latest World Economic Outlook makes for gloomy reading. Growth projections have been revised downward almost everywhere, especially in Europe and the big emerging markets such as China. And yet, when looking out over the next four years — the next presidential term — the IMF projects that the United States will be the strongest of the world’s rich economies. U.S. growth is forecast to average 3 percent, much stronger than that of Germany or France (1.2 percent) or even Canada (2.3 percent). Increasingly, the evidence suggests that the United States has come out of the financial crisis of 2008 in better shape than its peers — because of the actions of its government.

Perhaps the most important cause of America’s relative health is the Federal Reserve. Ben Bernanke understood the depths of the problem early and responded energetically and creatively. The clearest vindication of his actions has been that the European Central Bank, after charting the opposite course for three years with disastrous results, has adopted policies similar to the Fed’s — and averted a potential Lehman-like collapse in Europe. (Mitt Romney’s two most prominent academic advisers, Glenn Hubbard and Gregory Mankiw, seem to recognize this, but Romney apparently doesn’t. As recently as August the Republican presidential nominee repeated his criticisms of the Fed and promised to replace Bernanke at its helm.)

In addition to providing general liquidity, the Fed and the Treasury rescued the financial system but also forced it, through stress tests and new rules, to reform. The result is that U.S. banks are in much better shape than their European counterparts. Consumers have also been paying off debt, thanks to a series of tax cuts and other forms of relief.

A McKinsey & Co. study of crises in recent decades found that the United States is mirroring the pattern of countries with the strongest recoveries. It noted that “Debt in the financial sector relative to GDP has fallen back to levels last seen in 2000, before the credit bubble. US households have reduced their debt relative to disposable income by 15 percentage points, more than in any other country; at this rate, they could reach sustainable debt levels in two years or so.”

Kenneth Rogoff and Carmen Reinhart, the leading experts on financial crises, argue that the United States is performing better than most countries in similar circumstances. U.S. consumer confidence is at its highest levels since September 2007.

Every recovery since World War II has been led by housing, except this one.  But finally, housing is back. Two weeks ago, Jamie Dimon, the chief executive of JPMorgan Chase, declared that housing had turned the corner and predicted that, as a consequence, economic growth in 2013 would be so strong the Fed would have to raise interest rates. Given his firm’s vast mortgage portfolio, Dimon has a unique perspective on housing, and he is a smart man who knows that the Fed has promised to keep rates flat for three years. Last week, data on new housing starts confirmed Dimon’s optimism.

U.S. corporations have also bounced back. Corporate profits are at an all-time high as a percentage of gross domestic product, and companies have $1.7 trillion in cash on their balance sheets. The key to long-term recoveries from recessions is reform and restructuring, and U.S. businesses have been quick to respond.

Government intervention assisted this process with banks, auto companies and even in housing. Romney is correct to point out that the Obama administration supervised a managed bankruptcy in Detroit — forcing the kind of reform a private equity firm would have (though, crucially, providing the cash that a President Romney would not have). The Economist magazine, which initially opposed that bailout, reversed itself because of the manner in which General Motors and Chrysler were made to cut costs and become competitive.

And then there is America’s energy revolution, which is also bringing back manufacturing. U.S. exports, which have climbed 45 percent in the past four years, are at their highest level ever as a percentage of GDP.

All these good signs come with caveats. Europe continues to weaken. The fiscal cliff looms ominously. But the fact remains, compared with the rest of the industrialized world and the arc of previous post-bubble recoveries, the United States is ready for a robust revival.  This is partly because of the dynamism of the U.S. economy but also because of the timely and intelligent actions of the Fed and the Obama administration.

The next president will reap the rewards of work already done. So it would be the ultimate irony if, having strongly criticized almost every measure that contributed to these positive tends, Mitt Romney ends up presiding over what he would surely call “the Romney recovery.”

Buffett has skin in the housing game

Don't let anybody say I'm a blind cheerleader for Warren Buffett. (Maybe smarter or more pessimistic types can find a self-serving aim in Buffett's saying high U.S. corporate taxes are "myth," but I can't.)

So, let's just say Buffett is wily, hypocritical at times, and usually self-serving, but also often right. And anyway, with Buffett, we always have an easy way to find out what he really thinks: where he invests his money.

Warren Buffett Says "Hormones" Will Fix the Housing Crisis

By Matt Stoller

February 27, 2012 | Naked Capitalism

URL: http://www.nakedcapitalism.com/2012/02/matt-stoller-warren-buffett-says-hormones-will-fix-the-housing-crisis.html

Forbes: 'Every day is Black Friday' in housing sector

"Any sort of self-sustaining [housing sector] recovery, at this point, appears unfathomable."

The U.S. economy won't recover until housing recovers; and housing won't recover until the U.S. economy recovers. It's a perfect Catch-22!

So when's the last time you heard a single national-level politician offer an idea how to address this, the #1 problem our economy is facing right now? If they were waiting for the Fed's low interest rates to save us, they should have given up a year ago.

You know, I could almost respect a mean but frank right-winger who said, "Screw homeowners, banks and markets, let this foreclosure backlog work itself out," who would then be honest that this process could take years, maybe a decade, and in the meantime the U.S. economy would drag and unemployment would be high, no matter what else happened. But where is such an honest ideologue these days? No, instead the free-marketers and tea-party types want to blame our poor economy on excess federal regulation, Obamacare (which has yet to really take effect), and not enough oil drilling and coal mining. And nobody -- not the MSM or the Democrats -- are calling them on it.

The ones who haven't gone mute have gone insane!

'Every Day Is Black Friday' In Housing As Prices Tank, Case-Shiller Shows

By Agustino Fontevecchia

November 29, 2011 | Forbes

URL: http://www.forbes.com/sites/afontevecchia/2011/11/29/every-day-is-black-friday-in-housing-as-prices-tank-case-shiller-shows/

Double dip means time to buy?

The "double dip" in housing is now official. And the premier housing economist Mark Zandi of Moody's Analytics says it's a good time to buy, if you can afford it. Going back to 1986, the buy vs. rent ratio has never been so low.

"I think the arithmetic is such that if you plan to live in your home five or more years, then you should really consider buying a single-family home in most parts of the country at this point in time," Zandi said. "Prices have fallen so far, that single-family housing now is very, very attractive; very affordable [...] and it's now even attractive relative to renting."

"[H]omeownership has been such an important part of the American Dream, because people have used it as a way to save. And it's been a relatively safe way to save. Now of course, as we know as we have seen, there are ups and downs. But in general it's been a pretty good investment."

Just don't try to time the market; base your buying decision on your personal needs and financial wherewithal.

For Many, It's Still A Good Time To Buy A Home

By Chris Arnold

June 8, 2011 | NPR

URL: http://www.npr.org/137029194

Banks, real estate agents, & consumer advocates are all wrong

For the record, I'm in favor of preferred mortgage rates for those who pay 20 percent down on a house. [UPDATE: You can hardly qualify for a loan at any rate nowadays without 20 percent down.] It might sound illiberal of me, but during the Bush years too many darn people bought houses they couldn't afford, or speculated in housing as a leveraged investment, and that's partly why we're in this mess now.

And I'm in favor of proposed regulations that would require banks to hold on to 5 percent of the risk associated with bundled mortgagees, or mortgage-backed securities. Banks have to keep some skin in the game.

If buyers can't put down 20 percent, or their monthly mortgage payment is more than 1/3 their net monthly income, then they should buy a cheaper house, or rent. That is the old rule of thumb that was thrown out the window, to our detriment.

Politicians should not save the banks and bondholders (again) by propping up the housing market (again); we need time to let existing houses go down in price and clear the market. 13 percent of U.S. housing stock is currently sitting vacant. We need those thousands of McMansions to be sold at McDonald's prices!

New Rule Pushing Big Down Payments Could Make Homeownership Unaffordable

By Janell Ross

June 2, 2011 | Huffington Post

URL: http://www.huffingtonpost.com/2011/06/02/credit-counselors-survey_n_870011.html

Zillow: Homes fell $1.7 trillion in 2010, same in 2011

This year's estimated decline, more than the $1.05 trillion drop in 2009, brings the loss since the June 2006 home-price peak to $9 trillion, the Seattle-based company [Zillow] said today in a statement.

"It's definitely going to continue into 2011," Stan Humphries, Zillow's chief economist, said in an interview on Bloomberg Television today. "The back half of 2010 looked horrible and 2011 should look like the mirror image of that."

U.S. Home Values to Drop by $1.7 Trillion This Year, Zillow Says

By Hui-yong Yu and John Gittelsohn
December 10, 2010 Bloomberg

URL: http://www.bloomberg.com/news/2010-12-09/homes-in-u-s-poised-to-lose-1-7-trillion-in-value-this-year-zillow-says.html

MB360: 2.2 housing:income ratio wrecked since 2000

The magical 2.2 housing ratio between median nationwide home prices and household income – Nationwide home prices still inflated by 30 percent based on 50 years of household data.
Posted by mybudget360
November 30, 2010

The typical American family is facing the biggest economic uncertainty since the Great Depression and must feel like their lives are in a washer spin cycle. Many unemployed Americans are now entering a stage where unemployment insurance is being cut off which will send tens of thousands of people into the street. The mainstream media won't cover this because they rather gossip about the next tan face to drink themselves into a gutter at a nightclub. 43 million Americans are receiving some kind of food assistance yet this is some kind of recovery? Many are wondering how banks can produce such large profits without actually producing anything real or of substance in the economy. Yet banks are largely casinos that now operate to siphon off real wealth from the economy through bailouts, frauds, and other activities that harm the overall economy. In a decade where banks were unleashed to do what they may with limited regulation and a cozy Fed, we are now left with an economy in tatters but a banking sector that is still healthy based on oversized bonuses. I wanted to gather data over the last 60 years and measure how most Americans are now fairing. The data shows a largely underwater nation.

Let us look at the data carefully:

Back in 1950 the median home price cost a little above 2 times the annual median household income:

1950: $7354 / $3,319 =2.2

In 1960 the ratio remained roughly the same:

1960: $11,900 / $5,620 = 2.1

In fact, over this ten year period the typical household gained buying power when it came to housing. Even in 1970 the ratio became more favorable to US households:

1970: $17,000 / $9,867 =1.7

This was the lowest point at the start of any decade in modern history. After this point, with all the push for deregulation and allowing Wall Street to run rampant prices remained fairly stable only because of the two income household (that is until we hit 2000):

1980: $47,200 / $21,023 = 2.2

1990: $79,100 / $35,353 = 2.2

2000: $119,600 / $50,732 = 2.3

This was sustained via the two income household:

After this point, things went haywire. Incomes went stagnant or dropped yet home prices sky rocketed. Even today after the severe correction the ratio is still out of sync with 50 years of data:

2010: $170,500 / $50,221 = 3.3

In fact, given the current income levels the median nationwide home price should be down to $119,000 (a 30% drop from current levels). Some will argue that we should factor in for inflation. This would only be the case if we also saw wage growth. For the first time in modern history did we see wages stagnant for an entire decade. So the average American family is still looking at inflated assets and that is why we have millions of people sitting in underwater homes:

Just think of what negative equity represents. It represents a household that has over paid for a home. I don't think the desire to own a home has dramatically gone up or down in the last fifty years. Homeownership has always been a big part of the American Dream. But what happened over the last ten years is that banks were able to get their grubby hands on mortgages and convert them into another commodity where they could place large bets and ultimately push losses to taxpayers. People that over paid are paying via foreclosure. What is the penalty that banks are paying? That is why now that banks have raided and had their way with housing, they are looking for other markets to gamble in (with taxpayer money). The above chart shows the millions of homeowners who hold mortgages that are worth more than the homes they are in. Any thinking person realizes that the only way home prices are justified at current levels would be if incomes shot up to make the ratio closer to 2.2. Over half a century of data and never did we have a housing bubble on a nationwide level. All of a sudden Glass-Steagall is repealed in 1999 and a housing bubble takes off with banks leading the way because the line between investment and commercial banking was blurred. Only those who want to deceive themselves would place blame elsewhere.

The average American is going to struggle throughout the next decade. It is hard to see how wages will go up so it is likely that home prices will adjust lower given the magnitude of foreclosures in the pipeline. People might be jumping up and down about the recent job growth but they are occurring in lower paying sectors. So this does nothing to justify current prices. Low mortgage rates are merely a gimmick so banks can use cheap money to speculate on a global scale. Even with mortgage rates at levels we've never seen the housing market remains stalled like an old car. Why? Because the actual sticker price is still inflated based on income levels.

We need to reform the banking system, break up investment and commercial banks, and finally restore sanity in the market. There is a reason the metrics are all off but nothing has been done to change this so we are only a short ways away from another crisis. Ireland for example can be likened to a homeowner that took on too much debt with too little income. So the international banking sector idea of a solution is to extend them a credit line? What they should do is tell the IMF and Euro to shove it, default, and start from scratch and learn from their mistake. Otherwise, they'll be in the same position as Americans who bailed out their corrupt banking sector.