Deutsche Bank forecasts that by early 2011, 48 percent of all U.S. homeowners with mortgages will be “underwater” – that is, they will owe more on their mortgage than their home is worth. That’s nearly double the current percentage. There are good reasons to be skeptical of Deutsche Bank’s claims.
For instance, pending home sales rose for the fifth straight month in June, and in July one home-price index recorded its first increase since 2006. But a more fundamental problem with Deutsche Bank’s forecast is that whether it is right or wrong will depend on what policies our politicians in Washington adopt over the next two years. I’m skeptical that anyone can predict that with any precision.
Thus far, the Bush and Obama administrations have followed policies similar to those Japan pursued in response to its housing-bubble collapse in the early 1990s — fiscal stimulus packages, low interest rates, and bailouts. Japanese real-estate prices fell nearly 80 percent from 1991 to 1998 in response to these misguided polices. So Deutsche Bank could be right.
But there are reasons to believe the United States will begin a recovery, and home prices will not continue to fall. U.S. labor and capital markets are more flexible than those of Japan, allowing for quicker recovery despite policy interventions. Furthermore, it’s unlikely that foreigners will lend the U.S. government enough money for it to pass as many stimulus packages as Japan did (Japan passed 10). If the U.S. government stops intervening, recovery could begin soon, and Deutsche Bank’s forecast will be wrong.
The point here is that Deutsche Bank’s precise forecast gives the impression that it’s based on sound science and economic relationships. It’s not. Forecasts of home prices, and other indicators, two years from now depend on what policies Washington politicians will adopt in the interim. Forecasting that is anything but scientifically certain.
– Benjamin Powell is an assistant professor of economics at Suffolk University and co-editor of Housing America: Building Out of a Crisis.