The Economic Outlook: Recession and Opportunities By Dean Baker Co-Director of the Center for Economic and Policy Research (CEPR)

The economy will be in recession in 2009; 1.The housing bubble will continue to deflate. 2.The commercial real estate market also saw somewhat of a bubble which has now peaked; 3.The financial sector will continue to see big losses from bad mortgage debt and other debt; 4.Consumption will fall off due to lost housing wealth. 5.State and local government spending will also contract. 6.Unemployment will rise about 7 percent in 2009.

Real House Prices (Case-Shiller Index) 1.House prices more than doubled between 1996 and They have since fallen by more than 25 percent since This corresponds to a loss of more than $4 trillion in housing wealth.

House Prices Will Keep Falling Well Into 2009 Supply  Inventories of new homes stand at more than 10 months of sales.  Inventories of existing homes stand at more than 11 months of sales.  Vacancy rates for rental and ownership units are both near record highs

House Prices Will Keep Falling Well Into 2009 (cont’d) Vacancy Rates

Demand  Disappearance of subprime/ Alt-A markets  Tighter down payment requirements in collapsing markets  Loss of equity means many current homeowners lack down payments  Less trading up House Prices Will Keep Falling Well Into 2009 (cont’d)

Commercial Real Estate Boomed and Is Headed Downward  Non-residential construction is up more than 40 percent since  Hotel construction more than tripled, manufacturing doubled, office construction up 50 percent.  Retail and office vacancy rates are rising rapidly.  Manufacturing might hold up. Investment (Non-Residential Structures)

More Losses in Financial Sector 1.Delinquencies and foreclosures are rising rapidly, spreading from subprime to prime mortgages. 2.Many losses are being hidden by workouts with borrowers. 3.As house prices continue to fall, average loss per foreclosure will rise. 4.As the value of foreclosed homes rises (going from subprime to prime), losses per foreclosure will rise. 5.Home equity is a backdrop for other loans. With the loss of this backdrop, default rates are rising for other loans (e.g. car loans, credit cards, student loans).

The Recession Will Worsen the Situation in the Housing Market 1.The economy is shedding almost 100,000 jobs per month, unemployment has risen from 4.5 percent to 6.1 percent. 2.Workweeks have gotten shorter, real wages are down more than 2 percent. 3.Existing homeowners will lose their homes. Potential homeowners won’t be able to afford homes. 4.Banks will be constrained in lending due to large loan losses. 5.Recession will also hurt demand for non-residential property.

Lost Housing Equity Will Depress Consumption 1.Housing bubble fueled consumption boom. 2.The saving rate has been near zero since Baby boomers near retirement have almost no wealth. 4.Savings will rise and consumption (70 percent of GDP) will fall.

State and Local Governments Will Cut Back Spending 1) Collapse of housing bubble lowers property tax collections and other fees. 2) Lower consumption and fewer jobs reduce sales tax and income tax.

Possibilities for Reform 1) Punish Wall Street – it’s their fault. The financial industry is a major source of inequality. 2) Get the dollar down – move toward balanced trade. 3) Fix health care – we need to cover people and we need it for the economy.

Center for Economic and Policy Research