The economic outlook recession and opportunities
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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; The housing bubble will continue to deflate.

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The economic outlook recession and opportunities l.jpg
The Economic Outlook:Recession and Opportunities

By Dean Baker

Co-Director of the

Center for Economic and Policy Research (CEPR)


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  • The economy will be in recession in 2009;

  • The housing bubble will continue to deflate.

  • The commercial real estate market also saw somewhat of a bubble which has now peaked;

  • The financial sector will continue to see big losses from bad mortgage debt and other debt;

  • Consumption will fall off due to lost housing wealth.

  • State and local government spending will also contract.

  • Unemployment will rise about 7 percent in 2009.


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Real House Prices (Case-Shiller Index)

  • House prices more than doubled between 1996 and 2006.

  • They have since fallen by more than 25 percent since 2006.

  • This corresponds to a loss of more than $4 trillion in housing wealth.


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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


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House Prices Will Keep Falling

Well Into 2009 (cont’d)

Vacancy Rates


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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


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Commercial Real Estate Boomed and Is Headed Downward

  • Non-residential construction is up more than 40 percent since 2005.

  • Hotel construction more than tripled, manufacturing doubled, office construction up 50 percent.

  • Retail and office vacancy rates are rising rapidly.

  • Manufacturing might hold up.

Investment (Non-Residential Structures)


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More Losses in Financial Sector

  • Delinquencies and foreclosures are rising rapidly, spreading from subprime to prime mortgages.

  • Many losses are being hidden by workouts with borrowers.

  • As house prices continue to fall, average loss per foreclosure will rise.

  • As the value of foreclosed homes rises (going from subprime to prime), losses per foreclosure will rise.

  • 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).


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The Recession Will Worsen theSituation in the Housing Market

  • The economy is shedding almost 100,000 jobs per month, unemployment has risen from 4.5 percent to 6.1 percent.

  • Workweeks have gotten shorter, real wages are down more than 2 percent.

  • Existing homeowners will lose their homes. Potential homeowners won’t be able to afford homes.

  • Banks will be constrained in lending due to large loan losses.

  • Recession will also hurt demand for non-residential property.


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Lost Housing Equity Will Depress Consumption

  • Housing bubble fueled consumption boom.

  • The saving rate has been near zero since 2004.

  • Baby boomers near retirement have almost no wealth.

  • Savings will rise and consumption (70 percent of GDP) will fall.


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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.


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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.



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