Recovery in 2010? Krugman sees huge price declines in L.A.

Catching up on weekend reading: The Fortune magazine interview from last month with economist and columnist Paul Krugman is worth reading for its matter-of-fact pessimism. Highlights:

--Krugman sees housing prices falling by 25% "overall" and worse here: "In places like Miami or Los Angeles, you could be looking at 40% or 50% declines."

--Krugman sees economic recovery, as defined by job growth, coming in summer 2010 -- at the soonest: "But I wouldn't be surprised if it goes longer than that -- maybe into 2011."

--He sees a good chance the Fed will reduce interest rates to zero. (Not a typo.)

--Lastly, he favors public investments to revive the economy. This is not surprising given Krugman's general political leanings, but his reasoning is worth noting. "... Since this thing is going to go on for a long time, effectiveness is more crucial than speed. I'm actually for public investment now -- repairing bridges, building infrastructure. Normally people say if you try to do any public investment to stimulate the economy, the recession will be over before it can come online. But I don't think that's a problem this time."

Economist Stephen Roach made a similar argument a few weeks ago, and I tend to agree with it. Instead of focusing on "putting a floor" under housing prices, government should focus on public works projects. I know a large city of 10 million people or so that could use a decent public transportation system.

Here's a prediction: By election day, the economic argument will no longer be focused on how best to help homeowners avoid foreclosure but instead on what kind of major stimulus efforts are needed. Expect the Democratic nominee to embrace Krugman's logic.

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.

Comments

[sheila]

Finally! Someone with brains! I lobbied hard for "infrastructure" instead of the pathetic "economic stimulus package," but of course, was spitting into the wind. How much better for everyone to have an additional $5,000 tax break on Energy Star products, or home solar/wind systems than to get $1,200 which will only cover a few months' energy bills, especially once the cost of CO2 is included in the price of consuming CO2, rather than socialized to the planet!!

We need decentralized, local renewable energy generation and grid upgrades which will pay people for all the power they generate, which will count that power towards the state's RPS, and which will obviate the need for killing off a million acres of CA wilderness to build horrible, gigantic wind and solar "farms."

This will create tens of thousands of local, skilled labor jobs in manufacturing and installation and inspection, will meet CA's global warming goals, will greatly reduce our energy needs and bills, will stimulate the economy, will increase property values (and taxes) for high-caliber, net zero houses (which deserve it), and will encourage individual participation in the sustainability movement.

It will NOT interfere with market price adjustments to bubble homes, will encourage responsible behavior, and will not bail out giant corrupt corporations...

Everyone, everyone wins. So, why not?

[Maggie Knowles]

I think investing in public works is a great idea, especially since our infrastructure is in dire need of renewal. Just driving around Los Angeles, I get daily reminders of the bad conditions of our roadways.

Regarding falling prices of Los Angeles real estate, I received a report from http://www.foreclosureradar.com for Feb. 2008 - it states that there were 7,204 Notice of Defaults recorded in Feb. for Los Angeles County. If I'm reading the report right, most of these will go into foreclosure by June and there are more to come. This will surely increase inventory and increase pressure to lower prices.

More from the report:
~~~~~~~~~~~~~~~~~~~~
"February declines are a welcome break from the astonishing increases in December, 2007 and
January, 2008” said Sean O’Toole, founder of ForeclosureRadar. “Unfortunately, those increases and
the continued withdrawal of lending options point to more trouble ahead. Based on current activity
levels, we still do not expect foreclosures to peak earlier than the third or fourth quarter of 2008."

Lenders continue to take back 98 percent of foreclosures at auction, despite offering substantial
discounts. A year ago opening bids were discounted 30 percent or more on just 3 percent of sales.
Today, 77 percent of sales are discounted an average of 19 percent and 31 percent are discounted 30
percent or more.
~~~~~~~~~~~~~~~~~~~~~~~~~~

[H]

There are HUGE public infrastructure projects going on right now, paid for with staggering amounts--tens of billions of dollars--of US taxpayer money.

They happen to be taking place in Iraq.

[enlightenment]

--Krugman sees housing prices falling by 25% "overall" and worse here: "In places like Miami or Los Angeles, you could be looking at 40% or 50% declines."

AGREE!

You are a fool to buy a house in 2008.

[john]

I am a homeowner who is losing equity by the week (3K around here in SoCal they say - a week!), and am feeling pain of it...

But... I know that I paid peanuts for the house way back, and I know that over time it will reach it's income/price equilibrium... I am now resigned to it, maybe even relieved in some way...

Real economy can't be based on selling each other used houses.. As much as I may love to do that...

We need some real stuff, to see something grow before our eyes, to really turn things around

I agree that housing woes will soon drop off the radar for both pres candidates and mainstream media and be replaced with public works. We can't really make competitive pants, computers or what not. But we can make roads and bridges, just by the virtue of such projects not being out-source-able.

I think more and more people in power and media will simply let housing prices fall where they may and focus on some sort of 'new deal' to make jobs that really 'make something', because too many people (that I can see) are losing jobs or simply having stagnant wages that are being eaten away by inflation

When push comes to shove, housing is not as important as eating and paying for energy or transportation to get to work - and work itself....

[Uncle Billy Climbs Mont Pelerin]

Just for fun, maybe we can all select our infrastructure project lists for L.A.?

1) Subway stations every half mile throughout L.A.?
2) Roads: fix all the potholes?
3) Utilities: refer to Sheila's lists
4) Do something with the old air national guard base at Van Nuys airport?
5) Double the size and capacity of the ports?
6) Reinforce all bridges

So.... trying to think it through... we will use tax dollars to pay contractors to get the work done. It would be nice if more people paid their fair share first, otherwise we'll just be paving roads so that it'll be a little less bumpy for the Bentley.

[Dean Plassaras]

Looking at historical prices in So. Cal real estate, a bottom is not expected until 2012-2014. Hope sooner though.

[Liz]

I just want to correct Sheila's perception that wind and solar farms "kill off" millions of acres of california lands. The lands that the farms are on are unbuildable lands like slopes and mountains with strong wind tunnels.

[jb]

Sheila,
Hold your tongue! My "economic stimulus package" is already spoken for [strippers and booze, yipee].

just kidding, I am with you 100%. Our government officials have completely foresaken us. Our politicians are bought by lobbyists from home builders/bankers/wall street. We need to get rid of them - lets start with Dodd (note, I am a democrat who is fed up with my party, ok all parties).

I know one thing, we need a way to unite and have our voice heard. I am so disappointed in our leadership, they have lost all sense of fairness and are nothing short of crooked.

[A Scanner Darkly]

A $60,000K public works project to bring the Southland a state-of-the-art transit system might be a good investment long-term and prevent a deep recession. On the other hand, the same money would pay-off 300K $200,000 mortgages. So, we can give it the Banks to cover their greed and excess or build SoCal a transit system. That'd be a tough sell in either Peoria, Dalles or on Wall Street. One could say it's already hopeless; the Gov't already spent half of it on bailing out Bear Stearns.

[gary]

always entertaining to ask this question and reading the answers I get. Ok, we go: Since the interest rates are being lowered why not have the banks lower the CC rates to maybe a flat 5% for 3 years allowing people to PAY DOWN their debt. I estimate that half of my CC payment goes to interest.

[lefty]

funny these guys keep talking about japan real estate, who wants to live in japan?! lol well you can get great sukiyaki right here in fantastic metro L.A., where the sun shines!! so check out some open houses today and start shopping! by the way that korean food is pretty good too!

[storyteller]

http://www.valueinvestingcongress.com/pdf/T2
Partners_mortgages_bond.pdf

we're still in the beginning of this mess.

[storyteller]

and yes, i think interest rates will just about hit the floor

[sfvrealestate]

Very interesting, Peter, and very Rooseveltian. But what will all the whats-in-it-for-me posters on this blog say?

[dunnage]

1. Huge tax cuts that lead to record deficits. This debt would in the past been held in U.S. hands and the interest therefore in american pockets. No more.

2. A war being run off budjet.

3. Leaving no money for anything.

[Stop the Housing Bailout]

Great post. I would prefer a public works program to a housing bailout. The downside is that such programs are inevitably mismanaged and money sinks. Still, its better than the alternative.

[RON BURD]

Prices will still need to come down another 25-40%. My family makes 120k annualy. We cannot afford a nic ehome in a good school district.

[sunsetbeachguy]

Sheila and Krugman:

I will borrow from blackhat at Calculated Risk.

Working infrastructure is for wimps!

sarcasm off

[KungFuGrip]

Given Krugman's political leanings, did anyone seriously expect him to paint a rosy picture in an election year?

[anon]

"--He sees a good chance the Fed will reduce interest rates to zero. (Not a typo.)"

Peter,

There's no real reason why rates can't actually go negative: -0.5%; -1%; -2%.

It's only a psychological barrier.

It would just mean that the banks would have to pay back less than they borrowed. It would amount to a kind of rebate for borrowing.

Just another way to infuse capital liquidity into the system.

I would not count it out.

It may be a psychological barrier the Fed needs to break this time around.

[dunnage]

Negative interest rates: well, they could make money bombs. $20 bill cluster bombs dropping on the homefront.

[NoWayinLA]

Public works projects were one of the more effective New Deal tools. And considering that we've got a confluence of teetering economy and crumbling infrastructure, public works is a perfect fit.

But we've got a president who is a moron, so he'd rather give us money and ask us to buy jet skis instead.

[toby]

This post is single handily the best post ever posted here.

He's absolutely dead on about the servility of the correction and about which would better stimulate the economy.

If we would have spent a trillion dollars building and redoing our infrastructure instead of do that in Iraq, the last 7 years would have been an economic delight.

And Katrina probably wouldn't have happen either.

And YES, I do blame George W. Bush for it.

[brad]

Let's legalize marijuana and tax it and divert billions of dollars from the police, prosecutorial, and penal systems into a massive public works program that will put thousands of people to work and at the same time provide this country with the badly needed modernized infrastructure. It's that easy. No rocket science. Plain and simple.