Are Fundamentals "Sound"?
Dean Baker fears that they are not:
The inventory of unsold new homes is more than 50 percent higher than its previous record (1990). The number of vacant ownership units is almost 100 percent higher than its prior record (also 1990).... [T]he number of new homebuyers is about 7 percent higher. This... looks to me like... house prices are likely to plunge. In such an environment, it does not surprise me that rational investors do not want to hold mortgage backed securities. Nor does it surprise me that the Wall Street crew desperately want the Fed and Congress to find some way to take this dreck off their hands...
I guess the big difference is that I don't think that home prices are likely to plunge. Why not? Because Ben Bernanke is more aware than any other possible Fed Chair that large-scale housing asset price deflation threatens to have the same bad consequences as large-scale commodity price deflation, and I don't see a future in which he allows housing prices to fall without first taking major steps to prevent it.
