Paul Krugman Has Housing Bubble News That Will Scare the Crap Out of You

Posted by Christy Hardin Smith, Firedoglake at 10:45 AM on December 20, 2007.

Paul Krugman recently talked to Google regarding the housing bubble, bad loans, and where this all may go. The video runs 71 minutes -- and it will scare the crap out of you.

Have been trying to educate myself on economic issues by reading Calculated Risk, the WSJ, and other publications. It makes my eyes glaze over, but Krugman pulls this together into a more coherent construct.

Suddenly, things that looked bad individually look even worse in the aggregate. Reps. Brad Miller and Linda Sanchez are discussing this on DKos today -- worth dropping in to chat.

-- Via Krugman's blog:

According to the OFHEO data, prices in Houston rose only 26% over the last five years. But prices in Miami rose 115%. That is, the bubbles in the most bubbleicious areas were bigger than anything we've ever seen -- and there's every reason to think that the required fall in prices in those areas will be much bigger than anything we've seen since the Great Depression.

This reads like Enron for housing markets, doesn't it?

-- Energy prices are still high. Meaning ugly household budgets. Take home heating oil: the recent increase in aid to the poor for winter heating can't keep pace with increased costs.

-- There is a growing consensus that a recession is coming. Folks who are already being squeezed will have to tighten their belts even more -- some with no give left.

-- OTOH, as Mr. ReddHedd pointed out over coffee, everyone isn't defaulting, and a whole lot of lower income people have purchased homes due to low rates that wouldn't have otherwise. (Small consolation to those who are defaulting though.) There is a personal responsibility component: when we were looking at houses, we calculated a payment that didn't put us too far out on a shaky payment limb and then applied for a loan. We were offered some INSANE loan amounts -- and borrowed a lot less because it was better for us. Unfortunately, some folks didn't second guess those bank offers or catch the fine print in bad loans.

The responsibility for this falls partly on predatory lenders deliberately selling inappropriate products to low information consumers (this isn't all banks by any means). And on overinflated banking risk rosy scenario calculations. But it also falls in part on those who signed up for loans they couldn't afford. It's deception and poor planning in one bundle -- and we are all going to pay for it.

According to Krugman, it is going to be a bumpy ride. For everyone.

The costs of loan defaults, of housing value deflation, of increasing rental prices, of increased banking costs to recoup losses, of investment losses in retirement funds...it goes on and on. And that doesn't begin to touch families losing their homes. As Krugman says, there was a moment where things could have been corrected, a temporary patch that didn't hold was applied -- and then it got worse again. How much worse? Dunno...we are still sliding.

I can't help but think about those folks on the margins who can least afford to pay for someone else's bad risks. What a mess.

(H/T Allan, GSD)

Tagged as: energy, economy, housing, krugman, loans

Christy Hardin Smith is a former attorney, who earned her undergraduate degree at Smith College, in American Studies and Government, concentrating in American Foreign Policy. She then went on to graduate studies at the University of Pennsylvania in the field of political science and international relations/security studies, before attending law school at the College of Law at West Virginia University, where she was Associate Editor of the Law Review.