Monday, April 07, 2008


Y'all know who Krugman is, yes? If not, click on that link and get reading. You owe it to yourself.

So, Krugman is saying what YOU have been saying all along. Yup. From his interview:

How far do you think home prices will fall?

My preferred metric is the ratio of home prices to rental rates. By that measure, average home prices nationally got way too high. We'll probably basically retrace all that. So that's about a 25% decline in overall home prices. Only a fraction of that's happened so far. Of course, it varies a lot. In places like Houston or Atlanta, where home prices have not risen much compared with underlying rents, the decline will be relatively small. In places like Miami or Los Angeles, you could be looking at 40% or 50% declines.

What can Fed chairman Ben Bernanke do in terms of cutting rates? You wrote on your blog recently, "Keep cutting, Ben!"

Yeah, that's right. I'm now reasonably sure that they will cut again and again and again. A few cuts of 75 basis points and we'll be down to zero. And there's a pretty good chance that we're heading to zero, and that there's going to be a Japan-style ZIRP, zero-interest-rate policy.

Has that happened in the U.S. before?

Not since the 1930s. They didn't have the Fed funds target rate back then, but effectively we had a zero-interest-rate policy for a good part of the '30s. If the Fed responds this time with as much cutting as it did in the last two recessions, we get to zero. And then the problem is, What if that isn't enough? And there's a pretty good chance it won't be.


Andrew said...

Kate, you may enjoy this:


Emil said...

Most of Mr. Krugman's input seems quite reasonable (even though he has a somewhat apocalyptic point of view). The current status quo of home prices is just not economically sustainable over the long haul. Period.

Question is, how long will a complete correction take?