That is a GREAT question. I’ve thought about it often and I don’t know the answer. Short-term, if we can hold things together, I think they’ll be about the same. The powers that be seem engaged in a kind of stumbling defense of the status quo and a long, slow unwinding. The Bear and GSE bailouts offer us insight with their emergency meetings — they don’t know what to do. Many of the traditional options for dealing with the current environment are having limited effect or involve adverse consequences.
I used to think we would run out the value on all this debt with inflation, CPI of 10% over five years would certainly make all this ridiculous debt easier to carry. Sounds simple enough, and inflation is up. Problem is, output and wages aren’t following, unemployment is spiking, especially in certain regions, and the economy is at risk of a severe contraction. Asset prices are falling back down to earth, leaving the paper out to hang in the wind. On the dollar-side, debasing makes petrol expensive, which further crimps output. Throw in the outside possibility of a currency crash.
Some general observations, I’m certain the economic dislocations are going to be very severe in certain regions and the economic pain will be unevenly distributed, just as it was in the S&L crisis. We’re seeing this here in San Diego, with some neighborhoods getting devastated while others barely notice a difference. On balance, I think local RE will be down for a while. We’re a destination city with a diversified economy and all, but fundamentals are so incredibly out of whack — supply/demand, affordability, rent-price ratio, etc.
Back in 2005 or so, there was a lag between fed tightening and continued excesses in the real estate / mortgage business. I asked Rich what he thought about it. It was puzzling to me, and to him as well. Whatever the root cause (globalization?), it highlights how much we overestimated our ability to ‘scheme’ our way out of things, and underestimated the broader consequences of misguided behavior in the marketplace.
A quick aside, I’ve enjoyed following this website the past couple of years. It’s provided a wonderful forum for exactly these kinds of questions and conversations. (Many thanks, Rich.) All of us, we’re trying to figure things out as best we can, unchartered territory of sorts. Let’s hope it ends well.
