Active Rain January 4, 2010

Paul Krugman: Stick to Economics

Paul Krugman is a columnist at the New York Times who is known for his academic laurels and his liberal politics. He’s also a lightning rod for controversy, because he extrapolates his economist credentials to other subjects, drawing the ire of conservative critics and creating a cottage industry of Internet rebuttals. I’m no fan of Dr Krugman, but with Obama in office he has, predictably, refrained from politicizing everything. The net result is that Paul Krugman, economist, has actually begun to devote his column to economics, and the results border on the refreshing. 

His latest column warns of a repeat of 1937, when FDR thought that the Depression had ended, with the results that the economy took a nosedive. Whether you agree with Krugman or not, at the very least the column talks about something he knows about, economics, and his reasoning therefore is not hard to follow. In considering the problems with the market, it seems to me that the problem has reached Rubik’s Cube proportions, and it is hard to figure out exactly what policy should be taken. There are pros and cons to both the liberal and conservative approaches. 

I wrote the following comment:


While sitting on a short sale panel of the Westchester Putnam Board of Realtors at our annual meeting 2 months ago, we were asked if we saw an increase or decrease in short sales for 2010. Bucking the “yes” answer trend from my colleagues, a Bank of America official on the panel said “No.” At first we were shocked at what appeared to be optimism from a bank executive, until he explained why.

To paraphrase what he said: There will be fewer short sales in 2010 because they will be surpassed by bank foreclosures. Lots of them. B of A, he explained, currently owned 100,000 repossessed homes. In 18 months, that figure projected to be 300,000. That amount of REO properties flooding the inventory will have a terrible domino effect on the market. This is especially so when considering that most other major lenders (Chase, Wells, Citi etc) having similar numbers.

ANY blip up should be considered a “dead cat bounce” by those in leadership, and caution should be the rule of the decade. In post Great Depression America, we have never had 3 negative years in real estate in a row; 2010 will be the 5th consecutive down year, and the foreclosure rate promises more problems. It is so bad that pinning down a policy for recovery is virtually a Rubik’s cube. We are almost damned if we do and damned if we don’t. God help us if the government takes their eye off the ball.

It makes no broker any money to say this, but any ownership of real estate that is projected to be under 5 years is highly ill advised, especially if the property is highly leveraged (ie, low down payment). Is now still a good time to buy? Of course, but only for the long term. Since there is no appreciation curve to erase mistakes, buy and hold, because we still have a storm to endure for the next few years.


I wish I knew the answers. The recession that Bill Clinton inherited in 1993 was born of similar circumstances- the Savings and Loan failures of the late 1980s, a real estate crash, and a stock market crash all precipitated the Bush I recession. By and large, we grew out of that decline without massive government manipulation or spending. 

We have not grown out of this by a long shot, and as I said, the decline in real estate is unprecedented since the Depression. We all need to keep our eye on the ball, because this isn’t going to fix itself. Krugman doesn’t have the answer either, but he makes the problem far more understandable when he’s not grinding a partisan axe. 

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