Telling Stories

The standard story line being pushed these days by mainstream economists and the folks in the Bush administration is that the bad times are behind us and the economy is starting to rebound.

There has been modest growth over the last year, leading economists to believe "the country is finally on the verge of mounting a sustained rebound from the 2001 recession," as the Washington Post reported.

But jobs are still disappearing, there has been an increased number of layoffs, more people are living below the poverty line and median household income is on the decline.

And there appears to be more bad news on the horizon, with housing-price trends looking an awful lot like the stock market bubble of the last decade.

Dean Baker notes in the Sept. 22 issue of Economic and Reporting Review (, that if the home refinancing boom or the "housing bubble" were to bust, as is likely, it could trigger some harsh economic consequences.

Baker, who is co-director of the Center for Economic and Policy Research, writes that "home refinancing had been giving a huge boost to the economy," but "has slowed sharply in the last three months." This could mean employees in the banking and finance sectors are about to take a hit.

"Homeowners have been pulling equity out of their homes at more than a $200 billion annual rate, much of which has fueled consumption," he says. "In addition, the mortgage industry generates more than $50 billion a year in fees and directly employees over 400,000 people. The prospect of a sharp decline in this sector could significantly dampen growth later this year and next."

At the same time, he says, home prices have been rising at an unprecedented rate, outpacing the overall rate of inflation by nearly 35 percentage points over the last eight years.

"This bubble has played a huge role in sustaining the economy, both by directly stimulating housing construction and indirectly by allowing people to borrow against their homes to support other consumption," he writes. "If the bubble were to burst, it would have a huge impact and virtually guarantee a second dip to the recession."

The current housing market bubble is similar to the stock market of the late 1990s, he wrote earlier this year in In These Times, when stock prices were outpacing corporate earnings by record margins.

"When the market was hitting its peaks in 2000, the ratio of stock prices to corporate earnings exceeded 30-to-1, more than twice its historic average," he said. "No plausible explanation could ever have justified this sort of valuation." So it was obvious that the bubble was going to burst and when it did, the recession hit and jobs started disappearing.

If the housing bubble bursts, it could end whatever modest economic growth we've been experiencing and send the economy back into a tailspin. The housing market spurs borrowing, he says, "Families tend to see the rising value of their homes as a source of wealth that they can draw upon to meet their needs," especially with the low interest rates. "As a result, the ratio of mortgage debt to home equity is at near-record highs," he says.

So if housing prices fall, as they are likely to do, homeowners can be left with debt that exceeds what they could get for their houses. Follow this scenario: You buy a ranch house in central New Jersey in September for $280,000, the going rate, putting down the standard 20% (or $56,000) and financing the $224,000 balance. Six months from now, the housing bubble bursts in the area and housing stock loses 25% of its value. Suddenly, you're holding a $224,000 mortgage on a house worth $210,000. And that's assuming that housing values only drop 25%.

At the same time, he writes, the current high levels of mortgage debt seem inconsistent with an aging population.

"With the front end of the baby boomers approaching 60, many homeowners should be near to paying off their mortgage," he writes. "The demographics indicate that mortgage debt should be lower than it has been in prior decades. But on the contrary, many baby boomers are likely to hit retirement -- after having just lost much of the wealth in their 401(k)s due to the stock market crash -- and discover that their homes are worth much less than they had expected. These older baby boomers really need to be saving to ensure themselves a sufficient income in retirement, but the illusory wealth created by the housing bubble is preventing them from recognizing this fact."

None of this is good news. And no one seems to be saying much about it. It is not a topic of discussion among the major presidential contenders, nor are we hearing any of the mainstream economists offering their take on it. For them, the modest growth we've seen over the last year is good enough to declare our economy healthy.

Maybe that's why I have this uneasy feeling in the pit of my stomach.

Hank Kalet is a poet and managing editor for two central New Jersey newspapers. Email

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