Almost daily the mainstream news media is proclaiming that the housing crisis is over. A recent Wall Street Journal front page article boldly proclaimed “The Housing Bust Is Over.” No less an authority than Warren Buffett has suggested that housing has become a compelling investment opportunity.
Tops and bottoms in any market are not usually easily identified. We could recite innumerable predictions at the peak of housing prices in 2007 that housing was sound and that any price pullback would be limited. No less an “authority” than Fed Chief Ben Bernanke, was still forecasting a stable housing market just prior to the epic collapse in prices.
Exactly how stable would housing prices remain going forward if the United States tips into recession this year and how would that impact the stability of the banking system? According to economist Gary Shilling, the U.S. is already in recession which bodes poorly for job and income growth, both primary requirements for a stable housing market.
According to Schiller “We’ve had three consecutive months of declines in retail sales. That’s happened 29 times since they started collecting the data in 1947, and in 27 of the 29 we were either in a recession or within three months of it.”
Schiller thinks this recession will be worse since than the typical recession since the Federal Reserve has already slashed interest rates to zero. Lowering interest rates in past recessions has usually been the spark for recovery. Shilling also does not expect the housing market to recovery in a meaningful way which was also a catalyst for previous recoveries.
Another major impediment to economic recovery is the debt overhang which is still choking American consumers. The typical economic expansions from previous recessions were fueled by an expansion in credit which is not possible this time due to existing excessive debt burdens compounded by slow income growth.