I have a hard tome seeing an upturn lasting even two quarters. It seems to me it will simply kill itself off. The 50 bps rise in bond and mortgage rates will increase carrying costs for the home buyer to increase about 5%. And the recent run up in gasoline prices effectively negates the decrease in payroll taxes from the stimulus.

I have a feeling that we might already be near the choke point that these three see coming later. Mortgage applications for buyers have been flat at very low levels for a while now, and in the UMich consumer confidence report (the one the market jumped on) people planning to buy a house fell for the third month. And that was before the jump in rates last week.

The next step (if one accepts this economic analysis as I certainly do) is understanding its political ramifications.

First, does the White House (Summers) and Treasury (Geithner) see the economy in the same way–at least privately?

Second, if they do acknowledge this trend (privately anyway), what are their policy options for stemming household hemorrhaging?

and Three, what are the implications for the the 2010 Congressional elections if the Administration does/does not address this issue? (As badly disoriented as the Republicans are at the moment, it may not mean as much as it would have in other elections. Still, it could make for a nasty campaign–but what’s so different about that?)

Thank you for publishing this piece. Sure wish ARP put this out publicly!

This thinking is a bit sloppy, probably for effect. When all is said and done, the negative equity will be concentrated in about 30% of the outstanding mortgages. That means about 20% of all households will be under water, maybe 25% if there is a serious overshoot. (Don’t forget, about a third of the population rents.) Yes, the wealth effect will be large for all homeowners, and losses to mortgage owners will be huge, but the overall situation is not quite as dire as construed by taking “averages”.

Otherwise he makes good points.