This is the most emailed AND searched article on NYT. I think it's because it brilliantly written. The writer managed to succinctly capture the fear, trepidation and concerns over the economy shared by many investors, traders, businesspeople, and people in general, without getting too technical (technical enough, though), by including some relevant and in some cases frightening data, and quoting some notable people.
http://www.nytimes.com/2008/07/19/business/economy/19econ.html
By PETER S. GOODMAN
Published: July 19, 2008
You have heard that Fannie and Freddie, their gentle names notwithstanding, may cripple the financial system without a large infusion of taxpayer money. You have gleaned that jobs are disappearing, housing prices are plummeting, and paychecks are effectively shrinking as food and energy prices soar. You have noted the disturbing talk of crisis hovering over Wall Street.
Something has clearly gone wrong with the economy. But how bad are things, really? And how bad might they get before better days return? Even to many economists who recently thought the gloom was overblown, the situation looks grim. The economy is in the midst of a very rough patch. The worst is probably still ahead.
Job losses will probably accelerate through this year and into 2009, and the job market will probably stay weak even longer. Home prices will probably keep falling, shrinking household wealth and eroding spending power.
âThe open question is whether weâre in for a bad couple of years, or a bad decade,â said Kenneth S. Rogoff, a former chief economist at the International Monetary Fund, now a professor at Harvard.
Is this a recession?
Officially, no. The economy is not in recession until a panel at a private institution called the National Bureau of Economic Research says so. Unofficially, many economists think a recession started six or seven months ago, even as the economy has continued to expand â albeit at a tepid pace.
Many assume that if the economy expands at all, then it isnât a recession, but thatâs not true. The bureau defines a recession as âa significant decline in economic activity spread across the economy, lasting more than a few months.â If enough people lose their jobs, factories stop making things, stores stop selling things, and less money lands in peopleâs pockets, it is probably a recession.
Whatever it is called, it is a painful time for tens of millions of people. Indeed, this may turn out to be the most wrenching downturn since the two recessions in the early 1980s; almost surely worse than the recession that ended the technology bubble at the beginning of this decade; perhaps worse than the downturn of the early 1990s that followed the last dip in real estate prices.
But, despite what some doomsayers now proclaim, this is not the Great Depression, when unemployment spiked to 25 percent and millions of previously working people woke up in shantytowns. Not by any measure, even as your neighbors make cryptic remarks above dusting off lessons passed down from grandparents about how to turn a can of beans into a family meal.
How bad is housing?
Bad in many markets, awful in some, and still O.K. in a few.
The downturn has its roots in the real estate frenzy that turned lonely Nevada ranches into suburban ranch homes and swampland in Florida into condominiums. Speculators drove home prices beyond any historical connection to incomes. Gravity did the rest. After roughly doubling in value from 2000 to 2005, home prices have fallen about 17 percent â and more like 25 percent in inflation-adjusted terms â according to the widely watched Case-Shiller index.
Even so, most economists think house prices must fall an additional 10 to 15 percent to get back to reality. One useful measure is the relationship between the costs of buying and renting a home. From 1985 to 2002, the average American home sold for about 14 times the annual rent for a similar home, according to Moodyâs Economy.com. By early 2006, home prices ballooned to 25 times rental prices. Since then, the ratio has dipped back to about 20 â still far above the historical norm.
With mortgages now hard to obtain and speculation no longer attractive, arithmetic has replaced momentum as the guiding force for housing prices. The fundamental equation points down: Even as construction grinds down, there are still many more houses on the market than there are people to buy them, and more on the way as more homeowners slip into foreclosure.
By the reckoning of Economy.com, enough houses are on the market to satisfy demand for the next two-and-a-half years without building a single new one.
The time it takes to sell a newly completed house has expanded from an average of four months in 2005 to about nine months, according to analysis by Dean Baker, co-director of the Center for Economic and Policy Research.
And many sales are falling through â more than 30 percent in some parts of California and Florida â as buyers fail to secure financing, exacerbating the glut of homes, Mr. Baker said.
No wonder that in Los Angeles, San Francisco, Phoenix and Las Vegas, house prices have in recent months declined at annual rates of more than 33 percent.
When will banks revive?
So far, they have written off more than $300 billion in loans. Many experts now predict the toll will rise to $1 trillion or more â a staggering sum that could cripple many institutions for years.
Back when home prices were multiplying, banks poured oceans of borrowed money into real estate loans. Unlike the dot-com companies at the heart of the last speculative investment bubble, the new gold rush was centered on something that seemed unimpeachably solid â the American home.
But the whole thing worked only as long as housing prices rose. Falling prices landed like a bomb. Homeowners fell behind on their loans and could not qualify for new ones: There was no value left in their house to borrow against. As millions of people defaulted, the banks confronted enormous losses in a bloody period of reckoning.
In March, the Federal Reserve helped engineer a deal for JPMorgan Chase to buy troubled investment bank Bear Stearns. Many assumed the worst was over. But, this month, the open distress of Fannie Mae and Freddie Mac â two huge, government sponsored institutions that together own or guarantee nearly half of the nationâs $12 trillion in outstanding mortgages â sent a signal that more ugly surprises may lie in wait.
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http://www.nytimes.com/2008/07/19/business/economy/19econ.html
By PETER S. GOODMAN
Published: July 19, 2008
You have heard that Fannie and Freddie, their gentle names notwithstanding, may cripple the financial system without a large infusion of taxpayer money. You have gleaned that jobs are disappearing, housing prices are plummeting, and paychecks are effectively shrinking as food and energy prices soar. You have noted the disturbing talk of crisis hovering over Wall Street.
Something has clearly gone wrong with the economy. But how bad are things, really? And how bad might they get before better days return? Even to many economists who recently thought the gloom was overblown, the situation looks grim. The economy is in the midst of a very rough patch. The worst is probably still ahead.
Job losses will probably accelerate through this year and into 2009, and the job market will probably stay weak even longer. Home prices will probably keep falling, shrinking household wealth and eroding spending power.
âThe open question is whether weâre in for a bad couple of years, or a bad decade,â said Kenneth S. Rogoff, a former chief economist at the International Monetary Fund, now a professor at Harvard.
Is this a recession?
Officially, no. The economy is not in recession until a panel at a private institution called the National Bureau of Economic Research says so. Unofficially, many economists think a recession started six or seven months ago, even as the economy has continued to expand â albeit at a tepid pace.
Many assume that if the economy expands at all, then it isnât a recession, but thatâs not true. The bureau defines a recession as âa significant decline in economic activity spread across the economy, lasting more than a few months.â If enough people lose their jobs, factories stop making things, stores stop selling things, and less money lands in peopleâs pockets, it is probably a recession.
Whatever it is called, it is a painful time for tens of millions of people. Indeed, this may turn out to be the most wrenching downturn since the two recessions in the early 1980s; almost surely worse than the recession that ended the technology bubble at the beginning of this decade; perhaps worse than the downturn of the early 1990s that followed the last dip in real estate prices.
But, despite what some doomsayers now proclaim, this is not the Great Depression, when unemployment spiked to 25 percent and millions of previously working people woke up in shantytowns. Not by any measure, even as your neighbors make cryptic remarks above dusting off lessons passed down from grandparents about how to turn a can of beans into a family meal.
How bad is housing?
Bad in many markets, awful in some, and still O.K. in a few.
The downturn has its roots in the real estate frenzy that turned lonely Nevada ranches into suburban ranch homes and swampland in Florida into condominiums. Speculators drove home prices beyond any historical connection to incomes. Gravity did the rest. After roughly doubling in value from 2000 to 2005, home prices have fallen about 17 percent â and more like 25 percent in inflation-adjusted terms â according to the widely watched Case-Shiller index.
Even so, most economists think house prices must fall an additional 10 to 15 percent to get back to reality. One useful measure is the relationship between the costs of buying and renting a home. From 1985 to 2002, the average American home sold for about 14 times the annual rent for a similar home, according to Moodyâs Economy.com. By early 2006, home prices ballooned to 25 times rental prices. Since then, the ratio has dipped back to about 20 â still far above the historical norm.
With mortgages now hard to obtain and speculation no longer attractive, arithmetic has replaced momentum as the guiding force for housing prices. The fundamental equation points down: Even as construction grinds down, there are still many more houses on the market than there are people to buy them, and more on the way as more homeowners slip into foreclosure.
By the reckoning of Economy.com, enough houses are on the market to satisfy demand for the next two-and-a-half years without building a single new one.
The time it takes to sell a newly completed house has expanded from an average of four months in 2005 to about nine months, according to analysis by Dean Baker, co-director of the Center for Economic and Policy Research.
And many sales are falling through â more than 30 percent in some parts of California and Florida â as buyers fail to secure financing, exacerbating the glut of homes, Mr. Baker said.
No wonder that in Los Angeles, San Francisco, Phoenix and Las Vegas, house prices have in recent months declined at annual rates of more than 33 percent.
When will banks revive?
So far, they have written off more than $300 billion in loans. Many experts now predict the toll will rise to $1 trillion or more â a staggering sum that could cripple many institutions for years.
Back when home prices were multiplying, banks poured oceans of borrowed money into real estate loans. Unlike the dot-com companies at the heart of the last speculative investment bubble, the new gold rush was centered on something that seemed unimpeachably solid â the American home.
But the whole thing worked only as long as housing prices rose. Falling prices landed like a bomb. Homeowners fell behind on their loans and could not qualify for new ones: There was no value left in their house to borrow against. As millions of people defaulted, the banks confronted enormous losses in a bloody period of reckoning.
In March, the Federal Reserve helped engineer a deal for JPMorgan Chase to buy troubled investment bank Bear Stearns. Many assumed the worst was over. But, this month, the open distress of Fannie Mae and Freddie Mac â two huge, government sponsored institutions that together own or guarantee nearly half of the nationâs $12 trillion in outstanding mortgages â sent a signal that more ugly surprises may lie in wait.
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