4plex, thanks for the info. My suspicion is that the govt guarantees for home loans only modestly increased home affordability. My guess is that you think it decreased home affordability. We both know it’s more complicated than that. For people like me that save 100% of the purchase price before we buy, it has probably lowered home affordability (because I’m guessing it raised all prices). For some people who don’t save as much, it has increased affordability.
But 4plex, that wasn’t the subject of my curiosity. I just wanted to know if there was widely accepted data showing that the ratio of home prices to income had been permanently increased by the advent of the govt guarantee programs. It feels right, but is is widely accepted as true, and by how much? I’ll read the sources you gave me, but can you give me a heads-up on whether that particular part of the afforability analysis is clearly separated in the sources you referred to? And is that part widely accepted by different persuasions of the economic community? (Sorry about my obvious caution in working with the info. Economics is sad, you can get any result you want if you slice the data right.)
Allan, I think we agree that the Fed wants to administer a rap on the knuckles to excessive borrowers and risk-takers. But I don’t think they want anyone to lose a finger. I’d say a majority on this blog are hoping for very big home price drops (say 40-50%). I’d enjoy it, but I can’t see the Fed or others allowing it.
My own guess about how the price of risk in general will increase is that there will be more, quite a lot more, painful losses from mortgage loans, and that will just wake investors up to the possibility of serious losses on other asset classes. That’s if regulators and others allow the losses to go fairly big, maybe $100 billion or so. It’s nothing more than a gentle reminder, after smooth sailing for years, that a risk can become a real loss. Direct effects like consumer spending slowing because of housing slowdowns caused by tighter mortgage underwriting will be pointed to, but in reality I think it’s mostly just investment advisers realizing that if other things go wrong, they can’t throw up their hands and say “Who knew?” It won’t be earth-shaking, just a small measurable increase in the price of risk.
