It is an article of faith among those who proclaim the superiority of markets that they will solve all economic problems. When prices get low enough - for workers or houses, for instance - investor interest leads to a rebound in their fortunes. Except that it doesnt always work quite so cleanly.
The reason is usually due to what economists and policy wonks call 'information asymmetries' which frequently lead to 'irregularities' of the kind that discredited Fed Chair Alan Greenspan cited when he admitted that the market's inability to self-regulate prior to the financial crisis was a shock to him.
Information asymmetries are bits of knowledge possessed by one but not by most. The use of these asymmetries can be illegal, such as trading on inside information or they can simply represent the effect of herd mentality (the panicked equity selling during the crisis when the time to sell had surely passed). In any case, some investors have better information than others (thanks to research or inside information), some react to emotion (fear or greed) or personality (Bernie Madoff) or sometimes there is a reason that seems illogical to investors but perfectly reasonable to less involved observers.
In the case of housing, it is that politics and resultant government policies have kept unemployment largely stalled and workers' wages flat. That seems obvious as written, but for ideologues pressing a political case it is apostasy. However, the great thing about markets is that they produce lots of data, which can be assembled into facts. As long as people are transparent about the sources of the data and the methods by which the facts are created, facts dont lie. At the moment, housing prices are pretty cheap. The problem is that between unemployment and lower compensation, few can afford them or are willing to take the risk. As in so many cases, whether China's famine, Rwanda's killing fields, the US financial crisis, it is public policy that creates the conditions, not 'natural events.' Time to start thinking about why such self-defeating policies are stifling the housing markets. JL
The Buttonwood blog in The Economist comments:
"REAL disposable income for Americans was pretty much flat in the first quarter, according to figures released today. Spending edged up, thanks to a fall in the savings rate. But this is back to the bad old days of consumption financed on the never-never. Indeed, we seem to be attempting to reconstruct the pre-2007 economic model even though that model was shown to be deeply flawed. The recent post on profit margins was evidence of the same effect. And even the rally in the equity markets, propped up by quantitative easing, is merely a subsidy for the better-off and Wall Street traders, whose fortunes are more tied to share prices than those of the average Joe. Surely the point of economic policy is to benefit the average person, not the chosen few.
This is not apostasy. Certainly, policies that help businesses to expand and invest will help the average person over the medium term; but the current combination of policies seem to be helping Joseph the banker more than Joe the plumber. We are not really seeing an investment boom, and the recovery in employment is pretty sluggish for a typical recovery. How do we create a monetary policy that encourages bank lending to small businesses that does not always represent a transfer into bankers' bonus pools?
Anyway, to take a more cheerful line, the fall in the housing markets is creating some bargains. A recent post showed that US house prices look cheap relative to gold. The chart shows that they also look a much better bet than the stockmarket, on a long-term view. Judging by the latest plunge in pending home sales, it doesn't appear that many bargain-hunters are interested.
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