Transcript presentation - EARN: Economic Analysis and Research Network

The Economic Outlook:
Recession and Opportunities
By Dean Baker
Co-Director of the
Center for Economic and Policy Research (CEPR)
The economy will be in recession in 2009;
1.
The housing bubble will continue to deflate.
2. The commercial real estate market also saw somewhat of a
bubble which has now peaked;
3. The financial sector will continue to see big losses from bad
mortgage debt and other debt;
4. Consumption will fall off due to lost housing wealth.
5. State and local government spending will also contract.
6. Unemployment will rise about 7 percent in 2009.
Real House Prices
(Case-Shiller Index)
1.
House prices
more than
doubled between
1996 and 2006.
180
160
140
120
80
60
40
20
08
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0
96
3. This corresponds
to a loss of more
than $4 trillion in
housing wealth.
100
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n-
2. They have since
fallen by more
than 25 percent
since 2006.
House Prices Will Keep Falling
Well Into 2009
Supply
 Inventories of new homes stand at more than
10 months of sales.
 Inventories of existing homes stand at more
than 11 months of sales.
Vacancy rates for rental and ownership units
are both near record highs
House Prices Will Keep Falling
Well Into 2009 (cont’d)
12
Percent
8
6
4
2
0
19
56
19
59
19
62
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65
19
68
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71
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80
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95
19
98
20
01
20
04
20
0
20 7
08
-2
Vacancy
Rates
10
Rental
Ownership
House Prices Will Keep Falling
Well Into 2009 (cont’d)
Demand
Disappearance of subprime/ Alt-A markets
 Tighter down payment requirements in
collapsing markets
 Loss of equity means many current homeowners
lack down payments
 Less trading up
Commercial Real Estate Boomed
and Is Headed Downward
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220
20
08
20
07
20
07
20
06
20
06
20
05
20
05
200
20
04
Manufacturing might
hold up.
340
20
04

Retail and office
vacancy rates are
rising rapidly.
360
20
03

Hotel construction
more than tripled,
manufacturing
doubled, office
construction up 50
percent.
Investment (Non-Residential Structures)
20
03

Non-residential
construction is up
more than 40 percent
since 2005.
Billions of 2002 dollars

More Losses in Financial Sector
1. Delinquencies and foreclosures are rising rapidly,
spreading from subprime to prime mortgages.
2. Many losses are being hidden by workouts with borrowers.
3. As house prices continue to fall, average loss per
foreclosure will rise.
4. As the value of foreclosed homes rises (going from
subprime to prime), losses per foreclosure will rise.
5. Home equity is a backdrop for other loans. With the loss of
this backdrop, default rates are rising for other loans (e.g.
car loans, credit cards, student loans).
The Recession Will Worsen the
Situation in the Housing Market
1. The economy is shedding almost 100,000 jobs per month,
unemployment has risen from 4.5 percent to 6.1 percent.
2. Workweeks have gotten shorter, real wages are down more
than 2 percent.
3. Existing homeowners will lose their homes. Potential
homeowners won’t be able to afford homes.
4. Banks will be constrained in lending due to large loan
losses.
5. Recession will also hurt demand for non-residential
property.
Lost Housing Equity Will
Depress Consumption
1.
Housing bubble fueled consumption boom.
2. The saving rate has been near zero since
2004.
3. Baby boomers near retirement have almost
no wealth.
4. Savings will rise and consumption (70
percent of GDP) will fall.
State and Local Governments
Will Cut Back Spending

1) Collapse of housing bubble lowers
property tax collections and other fees.
 2) Lower consumption and fewer jobs
reduce sales tax and income tax.
Possibilities for Reform
1) Punish Wall Street – it’s their fault. The
financial industry is a major source of
inequality.
 2) Get the dollar down – move toward
balanced trade.
 3) Fix health care – we need to cover people
and we need it for the economy.

Center for Economic and Policy Research
www.cepr.net