Wednesday, December 26, 2007

Nouriel Roubini forecasts a hard landing...soon

It is here:

To some extent, this sounds like a liquidity trap story: regardless of interest rates, people won't invest because they don't trust anything or anyone. The stubbornly high spreads on LIBOR and prime jumbo mortgages suggest that there is something to this. It also explains why people such as Larry Summers think a fiscal stimulous is necessary.

But even with a fiscal stimulous, it is hard to see how housing will not be a drag for awhile. Inventories are high, meaning house prices will have to come down in some markets to restore equilibrium. This will put pressure on mortgage performance, which will make lenders even more wary. Ironically, once prices fall to equilibrium levels, mortgages going forward will again be very safe loans. But evidence from Jeremy Stein in one paper and David Genesove and Chris Mayer in another implies house prices are sticky downward, so it may be awhile before we reach that equilibrium point.

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